The purpose of this paper is to empirically test dynamic hedging, using data from the FTSE-100 and Standard & Poor’s (S&P) 500 futures indices.
The authors introduce a dynamic continuous-time hedging model in futures markets. The authors further relax the statistical-independence assumption between the spot price and basis risk.
The authors show that the investors are, on average, quite risk averse. The authors find that a one unit increase in the price volatility reduces the hedged FTSE-100 (S&P 500) by 645.62 (777.07) units. Similarly, a one unit increase in basis risk reduces the hedged FTSE-100 (S&P 500) by 403.57 (378.54) units. The authors’ approach shows that risk-averse investors should decrease their hedge (i.e. increase their equity allocation) with an increase in index price risk.
These findings are helpful to risk managers dealing with futures markets.
The contribution of this paper is that it successfully introduces a dynamic continuous-time hedging model in futures markets.
Alghalith, M., Floros, C. and Lalloo, R. (2015), "A note on dynamic hedging: Empirical evidence from FTSE-100 and S&P 500 futures markets", Journal of Risk Finance, Vol. 16 No. 2, pp. 190-196. https://doi.org/10.1108/JRF-10-2014-0143Download as .RIS
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