Template-type: ReDIF-Paper 1.0
Author-Name: Alfonso Novales 
Author-Email: anovales@ccee.ucm.es
Author-Homepage: https://www.ucm.es/fundamentos-analisis-economico2/novales-cinca,-alfonso
Author-Person: pno7
Author-Workplace-Name: Departamento de Economía Cuantitativa. Universidad Complutense de Madrid
Author-Workplace-Homepage: https://www.ucm.es/fundamentos-analisis-economico2
Author-Name: J.A. Lafuente 
Title: Optimal hedging under departures from the cost-of-carry valuation: evidence from the Spanish stock 
	index futures market 
Abstract: We provide an analytical discussion of the optimal hedge ratio under discrepancies between the 
	futures market price and its theoretical valuation according to the cost-of-carry model. Assuming 
	a geometric Brownian motion for spot prices, we model mispricing as a speci…c noise component in 
	the dynamics of futures market prices. Empirical evidence on the model is provided for the Spanish 
	stock index futures. Ex-ante simulations with actual data reveal that hedge ratios that take into 
	account the estimated, time-varying, correlation between the common and specific disturbances, lead 
	to using a lower number of futures contracts than under a systematic unit ratio, without generally 
	losing hedging e¤ectiveness, while reducing transaction costs and capital requirements. Besides, the 
	reduction in the number of contracts can be substantial over some periods. Finally, a meanvariance 
	expected utility function suggests that the economic benefits from an optimal hedge are substantial.
Classification-JEL: C51, G11, G13.
Keywords: Optimal hedging; Futures contract; Stock Index; GARCH models; Mispricing.
Length: pages 27
Creation-Date: 2002
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae0223.txt 
File-URL: https://eprints.ucm.es/id/eprint/7682/1/0223.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:0223