Hedging with the Nikkei index futures: The convential model versus the error correction model

W. L. Chou, K. K.Fan Denis, Cheng F. Lee

Research output: Contribution to journalArticlepeer-review

56 Scopus citations

Abstract

This study estimates and compares the hedge ratios of the conventional and the error correction models using Japan's Nikkei Stock Average (NSA) index and the NSA index futures with different time intervals. Comparisons of out-of-sample hedging performance reveal that the error correction model outperforms the conventional model, suggesting that the hedge ratios obtained by using the error correction model do a better job in reducing the risk of the cash position than those from the conventional model. In addition, this paper evaluates the effects of temporal aggregation on hedge ratios. It is found that temporal aggregation has important effects on the hedge ratio estimates.

Original languageEnglish (US)
Pages (from-to)495-505
Number of pages11
JournalQuarterly Review of Economics and Finance
Volume36
Issue number4
DOIs
StatePublished - Dec 1996

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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