A note on dynamic hedging: Empirical evidence from FTSE-100 and S&P 500 futures markets

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Practical implications

These findings are helpful to risk managers dealing with futures markets.

Originality/value

The contribution of this paper is that it successfully introduces a dynamic continuous-time hedging model in futures markets.

Citation

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-10-2014-0143

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