Data and results

The data employed in the Brooks, Henry and Persand (2002) study comprises 3,580 daily observations on the FTSE i00 stock index and stock index futures contract spanning the period 1 January 1985-9 April 1999. Several approaches to estimating the optimal hedge ratio are investigated.

The hedging effectiveness is first evaluated in-sample, that is, where the hedges are constructed and evaluated using the same set of data. The out-of-sample hedging effectiveness for a 1-day hedging horizon is also investigated by forming one-step-ahead forecasts of the conditional variance of the futures series and the conditional covariance between the spot and futures series. These forecasts are then translated into hedge

Table 8.5 Hedging effectiveness: summary statistics for portfolio returns

Table 8.5 Hedging effectiveness: summary statistics for portfolio returns

Return Variance

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