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On the Stationarity of Futures Hedge Ratios

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  • Degiannakis, Stavros
  • Floros, Christos
  • Salvador, Enrique
  • Vougas, Dimitrios

Abstract

Stationarity of hedge ratios can be viewed as a first step for portfolio hedging since it represents that the sensitivity of spot and futures returns follow a process whose main characteristics do not depend on time. However, we provide evidence that the hedge ratios of the main European stock indices are better described as a combination of two different mean-reverting stationary processes, which depend on the state of the market. Also, when analysing the dynamics of hedge ratios at intraday level, results display a similar picture suggesting that intraday dynamics of the hedge between spot and futures are driven mainly by market participants with similar perspectives of the investment horizon.

Suggested Citation

  • Degiannakis, Stavros & Floros, Christos & Salvador, Enrique & Vougas, Dimitrios, 2020. "On the Stationarity of Futures Hedge Ratios," MPRA Paper 102907, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:102907
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    More about this item

    Keywords

    Futures; Hedge Ratios; Intra-day Data; Multivariate Volatility Modelling; Regime-Switching; Stationarity.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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