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International Hedge Ratios for Index Futures Market: A Simultaneous Equations Approach

Author

Listed:
  • Cheng-Few Lee

    (Department of Finance, Rutgers University, USA)

  • Fu-Lai Lin

    (Department of Finance, Da-Yeh University, 168 University Rd, Da-Tsuen, Changhua, Taiwan 51591, R.O.C.)

  • Mei-Ling Chen

    (Department of International Business Management, Da-Yeh University, Taiwan)

Abstract

The main purpose of this paper is to investigate hedge ratios in terms of the international index futures markets. Instead of looking at hedging in a single market, we construct a simultaneous equations system to study the index hedging in the light of the cross-country linkage and interaction. The three-stage least squares (3SLS) estimating procedure is then applied to CAC40 and FTSE100 indices over the period 1990–2008. The empirical results indicate that the cross-country hedging strategy in both markets is feasible and the investors can bring down the holding position in own futures market. Moreover, the hedging effectiveness of cross-country hedging strategy performs better than the traditional single market hedging strategy in terms of the percentage reduction in variance.

Suggested Citation

  • Cheng-Few Lee & Fu-Lai Lin & Mei-Ling Chen, 2010. "International Hedge Ratios for Index Futures Market: A Simultaneous Equations Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 203-213.
    • Handle: RePEc:wsi:rpbfmp:v:13:y:2010:i:02:n:s0219091510001913
    DOI: 10.1142/S0219091510001913
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    Citations

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    Cited by:

    1. Cheng-Few Lee & Woan-lih Liang & Fu-Lai Lin & Yating Yang, 2016. "Applications of simultaneous equations in finance research: methods and empirical results," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 943-971, November.

    More about this item

    Keywords

    Hedge ratio; cross-country linkage; simultaneous equation; three-stage least squares;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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