The effectiveness of index futures hedging in emerging markets during the crisis period of 2008-2010: Evidence from South Africa

ABSTRACT

This article provides an assessment of the comparative effectiveness of four econometric methods in estimating the optimal hedge ratio in an emerging equity market, particularly the South African equity and futures markets. The article bases the effectiveness of hedging on volatility reduction and minimization of the coefficient of variation of hedged returns as well as risk-aversion-based utility maximization. The empirical analysis shows that the vector error-correction method and multivariate generalized autoregressive conditional heteroscedasticity methods are most effective over relatively long horizon, weekly and monthly hedging periods.

KEYWORDS:

• Emerging markets
• optimal hedge ratio
• South Africa
• index futures hedging
• vector autoregression
• vector error-correction
• Generalized Autoregressive Conditional Heteroscedasticity (GARCH)

JEL CLASSIFICATION:

• C51
• C52
• G11
• G15

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See Section 3.3