Time-Varying Structure of the Optimal Hedge Ratio for Emerging Markets
Keywords:Financial Markets, Asset Markets; Spot and Future Market; Optimal Hedging Ratio
Emerging markets are more exposed to risk than developed markets. Therefore, they require risk management using futures market instruments. This study aims to determine the hedging effectiveness of the spot index market risks in the stock index futures market in Brazil, Russia, India, South Africa, and Turkey. Measuring the hedging effectiveness level of futures markets is vital for these countries because investors must remain in the stock markets for the sustainability of the financial markets and economies. Weekly closing data for the period from January 2009 to October 2021 were analyzed via a dynamic method referred to as flexible least squares (FLS). Although the FLS results show that futures transactions provide high hedging effectiveness for all countries within the scope of this study, country-specific conditions may reduce the hedging effectiveness.
Anjana Raju, G., & Velip, S. P. (2018). An empirical study on optimal hedge ratio and hedging effectiveness of Nifty IT Index Stocks. International Journal of Research Culture Society, 2(1), 178-185.
Antova, I., & Tahar, T. (2020). Managing Crypto-pegged Exchange Rates Risks in Islamic Banks in the Era of Digitalization Economy and Tokenization. Journal of Islamic Finance, 9(1), 46 - 60.
Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31(3), 307-327. http://dx.doi.org/10.1016/0304-4076(86)90063-1
Brooks, C. (2008). Introductory econometrics for finance (2nd ed.). New York: Cambridge University Press.
Büberkökü, Ö. (2019). Bist 30 Endeksi ve Dolar-TL Kuru İçin Futures Kontratlara Dayalı Optimal Hedge Rasyolarının ve Hedging Etkinliğinin İncelenmesi: Kapsamlı Bir Analiz. Finans Ekonomi ve Sosyal Araştırmalar Dergisi, 4(4), 514-544.
Buyukkara, G., Kucukozmen, C. C., & Uysal, E. T. (2022). Optimal hedge ratios and hedging effectiveness: An analysis of the Turkish futures market. Borsa Istanbul Review, 22(1), 92-102. http://dx.doi.org/10.1016/j.bir.2021.02.002
Can, C. K. (2021). A Time-Varying Analysis of the Public Debt Sustainability in Turkey with Flexible Least Squares Technique. Uluslararası İktisadi ve İdari İncelemeler Dergisi(31), 129-144. http://dx.doi.org/10.18092/ulikidince.827340
Çelik, İ. (2014). Vadeli İşlem Piyasasında Optimal Hedge Rasyosunun Statik ve Dinamik Teknikler Yardımıyla Hesaplanması. Uluslararası Alanya İşletme Fakültesi Dergisi, 6(3), 1-13.
Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057-1072. http://dx.doi.org/10.2307/1912517
Ederington, L. H. (1979). The hedging performance of the new futures markets. The Journal of Finance, 34(1), 157-170. http://dx.doi.org/10.1111/j.1540-6261.1979.tb02077.x
Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987-1007. http://dx.doi.org/10.2307/1912773
Ersoy, E., & Çıtak, L. (2015). Intraday Lead-Lag Relationship between Stock Index and Stock Index Futures Markets: Evidence from Turkey. Business and Economics Research Journal, 6(3), 1-18.
Fabozzi, F. J., & Fabozzi, F. A. (2022). A Primer on Hedging with Stock Index Futures. Journal of Derivatives, 29(4), 39-60. http://dx.doi.org/10.3905/jod.2022.1.159
Gök, İ. Y. (2016). Optimal Hedge Ratio and Hedging Effectiveness in Turkish Stock Index Futures Market. Ege Academic Review, 16(4), 719-732.
Gupta, K., & Singh, B. (2009). Estimating the Optimal Hedge Ratio in the Indian Equity Futures Market. IUP Journal of Financial Risk Management, 6(3&4), 38-98.
Güzel, F. (2021). Vadeli ve Spot Kurlar Arasında Nedensellik ve Fiyat Keşfi: Borsa İstanbul Üzerine Ampirik Bir Analiz. Sosyoekonomi, 29(48), 427-442. http://dx.doi.org/10.17233/sosyoekonomi.2021.02.20
Hamma, W., Ghorbel, A., & Jarboui, A. (2021). Hedging Islamic and conventional stock markets with other financial assets: Comparison between competing DCC models on hedging effectiveness. Journal of Asset Management, 22(3), 179-199. http://dx.doi.org/10.1057/s41260-021-00208-2
Holmes, P. (1996). Stock index futures hedging: Hedge ratio estimation, duration effects, expiration effects and hedge ratio stability. Journal of Business Finance & Accounting, 23(1), 63-77. http://dx.doi.org/10.1111/j.1468-5957.1996.tb00402.x
Hsiao, Y. J., & Tsai, W. C. (2018). Financial literacy and participation in the derivatives markets. Journal of Banking & Finance, 88(March ), 15-29. http://dx.doi.org/10.1016/j.jbankfin.2017.11.006
Hutcheson, T. J. (2003). Lead-lag relationship in currency markets. Paper presented at the 17th Australasian Finance and Banking Conference.
Johnson, L. L. (1960). The theory of hedging and speculation in commodity futures. The Review of Economic Studies, 27(3), 139-151. http://dx.doi.org/10.2307/2296076
Kalaba, R., & Tesfatsion, L. (1989). Time-varying linear regression via flexible least squares. Computers & Mathematics with Applications, 17(8-9), 1215-1245. http://dx.doi.org/10.1016/0898-1221(89)90091-6
Kalayci, Ş., & Zeynel, E. (2009). Vadeli Piyasalarda Riskten Korunma: VOB-İMKB 30 Endeks Sözleşmeleri Kullanımına Dayalı Korunma Oranı ve Korunma Etkinliği. Süleyman Demirel Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 14(3), 39-63.
Kaur, M., & Gupta, K. (2018). Mandeep Kaur, Kapil Gupta, 2018. Estimation of hedging effectiveness using variance reduction and risk-return approaches: Evidence from National Stock Exchange of India. International Journal of Business Analytics and Intelligence, 6(1), 35-46.
Kwiatkowski, D., Phillips, P. C., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54(1-3), 159-178. http://dx.doi.org/10.1016/0304-4076(92)90104-Y
Lakshina, V. (2017). Hedging and risk aversion on Russian stock market: Strategies based on MGARCH and MSV models. Proceedings of the 2nd Workshop on Computer Modelling in Decision Making, 83-92. Retrieved from http://ceur-ws.org/Vol-2018/paper-10.pdf
Lien, D., & Shrestha, K. (2005). Estimating the optimal hedge ratio with focus information criterion. Journal of Futures Markets, 25(10), 1011-1024. http://dx.doi.org/10.1002/fut.20166
Lien, D., Shrestha, K., & Wu, J. (2016). Quantile Estimation of Optimal Hedge Ratio. Journal of Futures Markets, 36(2), 194-214. http://dx.doi.org/10.1002/fut.21712
Narayan, P. K., & Narayan, S. (2005). Are exports and imports cointegrated? Evidence from 22 least developed countries. Applied Economics Letters, 12(6), 375-378. http://dx.doi.org/10.1080/13504850500067774
Özaydın, O. (2018). Vadeli BIST 30 Endeksi Kontratları Üzerine Koruma Oranı Tahmini ve Koruma Oranı Etkinliği. Bankacılık ve Sermaye Piyasası Araştırmaları Dergisi, 2(6), 16-27.
Özçağ, M. (2015). Türkiye’de enerji tüketimi, ekonomik büyüme ve dışa açıklık ilişkisi: ARDL modeli. Finans Politik ve Ekonomik Yorumlar, 52(605), 7-17.
Özen, E., & Tetik, M. (2019). Did developed and developing stock markets react similarly to Dow Jones during 2008 crisis? Frontiers in Applied Mathematics and Statistics, 5(October ), 1-7. http://dx.doi.org/10.3389/fams.2019.00049
Phillips, P. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346. http://dx.doi.org/10.1093/biomet/75.2.335
Rasool, N., Bashir, S., & Hussain, M. M. (2021). Assessing the Relationship Between Financial Literacy and Participation in the Derivatives Market: Empirical Evidence from Pakistan Stock Exchange. Journal of ISOSS, 7(2), 281-292.
Rosenberg, J. V., & Traub, L. G. (2009). Price discovery in the foreign currency futures and spot market. The Journal of Derivatives, 17(2), 7-25. http://dx.doi.org/10.3905/JOD.2009.17.2.007
Singh, G. (2017). Estimating optimal hedge ratio and hedging effectiveness in the NSE index futures. Jindal Journal of Business Research, 6(2), 108-131. http://dx.doi.org/10.1177/2278682117715358
Soybilgen, B., & Eroğlu, B. A. (2019). Time-varying Taylor rule estimation for Turkey with flexible least square method. . Bogazici Journal Review of Social Economic and Administrative Studies, 33(2), 122-139. http://dx.doi.org/10.21773/boun.33.2.3
Stein, J. L. (1961). The simultaneous determination of spot and futures prices. The American Economic Review, 51(5), 1012-1025.
Sutcliffe, C. M. S. (1993). Stock Index Futures: Theories and International Evidence (1st ed.). New York: Chapman & Hall.
Tarchella, S., & Dhaoui, A. (2021). Chinese jigsaw: Solving the equity market response to the COVID-19 crisis: Do alternative asset provide effective hedging performance? Research in International Business and Finance, 58(December ), 1-14. http://dx.doi.org/10.1016/j.ribaf.2021.101499
Urtubia, P., Novales, A., & Mora-Valencia, A. (2021). Cross-Hedging Portfolios in Emerging Stock Markets: Evidence for the LATIBEX Index. Mathematics, 9(21), 1-19. http://dx.doi.org/10.3390/math9212736
World Federation of Exchanges. (2021). Derivatives Report 2021. Retrieved from https://www.world-exchanges.org/storage/app/media/2021%20Annual%20Derivatives%20Report.pdf
Yıldırım, Y. (2016). Healthier and more educated society improves multifactor productivity: time varying relationships. Yönetim Bilimleri Dergisi, 14(27), 111-141.
Zainudin, A. D., & Mohamad, A. (2021). Cross hedging with stock index futures. The Quarterly Review of Economics and Finance, 82(November ), 128-144. http://dx.doi.org/10.1016/j.qref.2021.08.005
How to Cite
Copyright (c) 2022 Metin Tetik, Ercan Özen
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
All accepted papers are published on an Open Access basis.
The Open Access License is based on the Creative Commons license.
The non-commercial use of the article will be governed by the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License as currently displayed on https://creativecommons.org/licenses/by-nc-nd/4.0
Under the Creative Commons Attribution-NonCommercial-NoDerivatives license, the author(s) and users are free to share (copy, distribute and transmit the contribution) under the following conditions:
1. they must attribute the contribution in the manner specified by the author or licensor,
2. they may not use this contribution for commercial purposes,
3. they may not alter, transform, or build upon this work.