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Hedging Effectiveness of the EURO STOXX 50 Index Futures Contracts


Panagakou, E., & Stöckl, S. (2016). Hedging Effectiveness of the EURO STOXX 50 Index Futures Contracts. University of Liechtenstein.




This study investigates the hedging effectiveness of constant and time-varying optimal hedge ratios based on empirical evidence from the European market. In particular, it examines the effectiveness of hedging the EURO STOXX 50 stock portfolio using its respective index futures by employing different hedge ratios. The studied period expands from July 1st, 1998 up to April 29th, 2016, which is split into two subsamples, due to a probable structural break in the relation between index and futures around the beginning of 2006. For all samples we conduct in-sample as well as out-of-sample analysis and evaluate hedging effectiveness in terms of variance reduction and utility increase. The models employed are a naïve hedge ratio, an OLS and an EWMA derived hedge ratio, as well as more complex multivariate GARCH models, namely VAR-GARCH and VECM-GARCH with a Dynamic Conditional Correlation structure. The complex models exhibit overall superior performance, but the simpler are those to outperform in the second sample after the structural break. Even when the complex models do outperform, their additional contribution is marginal. Moreover, they react strongly to the presence of (discounted) dividends at certain rollover dates and therefore the simpler models might be preferred by EURO STOXX 50 market participants.



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