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

In: Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes

Author

Listed:
  • Cheng Few Lee
  • Fu-Lai Lin
  • Mei-Ling Chen

Abstract

The main purpose of this chapter is to investigate hedge ratios in terms of the international index futures markets. Instead of looking at hedging in a single market, we here 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 S&P500, FTSE100, and NIKKEI225 indices over the period 1990–2020. 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, 2024. "International Hedge Ratios for Index Futures Market: A Simultaneous Equations Approach," World Scientific Book Chapters, in: Cheng Few Lee & Alice C Lee & John C Lee (ed.), Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes, chapter 51, pages 1637-1647, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811269943_0051
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    Keywords

    Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G1 - Financial Economics - - General Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • G3 - Financial Economics - - Corporate Finance and Governance

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