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Examining the Hedging Effectiveness of Futures Contracts over Pre and Post Financial Crisis Period: Evidence from National Stock Exchange of India

International Journal of Banking, Risk and Insurance

Volume 3 Issue 2

Published: 2015
Author(s) Name: Kapil Gupta, Mandeep Kaur | Author(s) Affiliation: Punjab Inst. of Mgt (PIM), I. K. Gujral Punjab Technical University, Kapurthala, Punjab, India.
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Abstract

Present study examines the efficiency of futures contracts in hedging unwanted price risk over highly volatile period i.e. June 2000 - December 2007 and January 2008 – June 2014, pre and post-financial crisis period, by using S&PC NXNIFTY, CNXIT and BANKNIFTY for near month futures contracts. The hedge ratios have been estimated by using five methods namely Ederingtons Model, ARMA-OLS, GARCH (p,q), EGARCH (p,q) and TGARCH (p,q). The study finds that hedging effectiveness increased during post crisis period for S&PC NXNIFTY and BANKNIFTY. However, for CNXIT hedging effectiveness was better during pre-crisis period than post crisis. The study also finds that time-invariant hedge ratio is more efficient than time-variant hedge ratio.

Keywords: Hedge Ratio, Hedge Horizon, Basis Risk, Heteroscedasticity, Conditional Volatility

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