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An Algebraic Model for Hedging Equity Index Portfolios With Stock Index Futures: Evidence from the IBEX 35

Journal of Insurance and Financial Management

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Title An Algebraic Model for Hedging Equity Index Portfolios With Stock Index Futures: Evidence from the IBEX 35
 
Creator Sanchez-Verdasco, Javier
 
Description This article develops a Hedging Algebraic Model (HAM) for equity index portfolios with stock index futures as an alternative to econometric models (OLS, ECM, and GARCH) and assesses the efficacy of the model when applied to the IBEX 35 for the period 2007-2015. The model is initially formulated based on the efficient market hypothesis and an infinitesimal time horizon. When we relax these assumptions in the empirical analysis and apply the model to the real market with a daily time horizon, we obtain 98.75% efficacy of the hedge, superior to that of the econometric models. The time series of econometric models used to date for the calculation of the optimal hedging ratio do not include the effect of discrete dividend payouts and are based on a series of next-to-expire future prices that are subject to jumps in price, as it is composed of a chained series of futures with different maturities. Although the efficacy of econometric models can be considered satisfactory in general terms, their limitations can generate significant errors at some points in the series. The HAM model presented here as an alternative approach to econometrics models yields superior results, both in hedging efficacy and in the ease of application in professional portfolio management.
 
Publisher Journal of Insurance and Financial Management
 
Contributor —
 
Date 2017-01-18
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier https://journal-of-insurance-and-financial-management.com/index.php/JIFM/article/view/71
 
Source Journal of Insurance and Financial Management; Vol 2, No 5 (2017): Journal of Insurance and Financial Management
2371-2112
 
Language eng
 
Relation https://journal-of-insurance-and-financial-management.com/index.php/JIFM/article/view/71/pdf
 
Rights Copyright (c) 2017 Javier Sanchez-Verdasco
http://creativecommons.org/licenses/by/4.0