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

Moawia Alghalith, Christos Floros, Ricardo Lalloo

    Research output: Contribution to journalArticlepeer-review

    1 Citation (Scopus)

    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.

    Original languageEnglish
    Pages (from-to)190-196
    Number of pages7
    JournalJournal of Risk Finance
    Volume16
    Issue number2
    DOIs
    Publication statusPublished - 16 Mar 2015

    Keywords

    • Basis risk
    • D8, G1
    • Dynamic hedging
    • FTSE-100
    • Futures
    • S&P 500

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