Comparative Analysis of Constant and Time-Varying Optimal Hedge Ratios & Hedging Effectiveness in Developed and Emerging Futures Exchanges

In this study we compare the hedging effectiveness and hedge ratio estimation methods of Gold futures markets in Chicago Mercantile Exchange (CME) as a well-developed market and Iran Mercantile Exchange (IME) as an emerging market by employing various econometric hedge ratio estimation methods involve ordinary least square technique (OLS); vector autoregressive method (VAR); and vector error correction method (VECM) to estimate constant hedge ratios and Diagonal VEC-GARCH method to estimate time-varying hedge ratios. Empirical results indicate that the VECM method performed better than the VAR and OLS methods, while the DVEC-GARCH method performed the best in portfolio variance reduction for both markets. So the time-varying hedge ratio methods were superior to the constant hedge ratios methods. It is also shown that when we compare hedging effectiveness between well-developed (CME) and emerging (IME) futures exchanges, investors in an emerging exchange can reduce their portfolio variance in about 80% and more, while investors in a well-developed exchange can achieve more than 95%.

کلیدواژه ها:

hedging effectiveness ، hedge ratio ، futures contracts