Title

Optimal hedge ratio with moving least squares - An empirical study using Indian single stock futures data

Date of this Version

12-1-2011

Document Type

Journal Article

Publication Details

Published Version.

Bhattacharya, S., Singh, H., & Martins Alas, R. (2011). Optimal hedge ratio with moving least squares - An empirical study using Indian single stock futures data. International Research Journal of Finance and Economics, 79, 98-111.

Access the journal

2011 HERDC submission. FoR code: 140207

© Copyright EuroJournals Publishing, Inc. 2011

International Research Journal of Finance and Economics is an open access journal.

ISSN

1450-2887

Abstract

The use of commodity, currency and stock index futures to hedge risky exposures in the underlying assets is well documented in financial literature. However single stock futures are a relatively new addition to the family of futures and as such, academic research on its use as a hedging tool is relatively thin. In this study we have explored the efficacy of two different methodological approaches that may be applied when hedging a long position in the underlying stock with a single stock future. We use daily trading data covering years 2002 to 2007 from the Indian market, where single stock futures have been really thriving in terms of volume of trade, to extract the optimal hedge ratios using both static OLS as well as 30-day, 60-day and 90-day moving least squares. The method of moving least squares has been in use by market practitioners for some time primarily as a trend analysis and charting tool. Our results indicate that the moving least squares approach outperforms the static OLS in terms of the hedging efficiency, which has been measured by the root mean square hedging error.

 

This document has been peer reviewed.