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Is Cross-Hedging Effective for Mitigating Equity Investment Risks in the Indian Banking Sector?

Is Cross-Hedging Effective for Mitigating Equity Investment Risks in the Indian Banking Sector? Can the investments in securities devoid of futures be effectively hedged? If so, what is the best cross-hedging instrument? The study evaluates the efficacy of the cross-hedging strategy for small and medium investors interested in banking sector stocks devoid of futures using the market index, sectoral index and stock futures from the same sector. The risk mitigation ability of each portfolio is estimated for different trade horizons using near-month futures and spot prices. The optimal futures contract size for minimising risk exposure is calculated using the Diagonal BEKK GARCH model with a minimum-variance approach. The cross-hedging portfolio with BANK NIFTY futures performs consistently well in a longer trading horizon with higher hedging costs. A cross-hedging portfolio with single stock futures also shows an excellent risk reduction potential but is less expensive than other alternatives. Fundamental investors achieve risk reduction up to 53.74 per cent cross-hedging using BANK NIFTY futures. Investors can construct cross-hedging portfolios with a closely matching return profile and hold these positions for a longer trade horizon to achieve higher risk reduction. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Financial Markets Springer Journals

Is Cross-Hedging Effective for Mitigating Equity Investment Risks in the Indian Banking Sector?

Jose, Babu; Jose, Nithin
Asia-Pacific Financial Markets , Volume 30 (1) – Mar 1, 2023
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References (88)

Publisher
Springer Journals
Copyright
Copyright © The Author(s), under exclusive licence to Springer Japan KK, part of Springer Nature 2022. Springer Nature or its licensor holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
ISSN
1387-2834
eISSN
1573-6946
DOI
10.1007/s10690-022-09383-7
Publisher site
See Article on Publisher Site

Abstract

Can the investments in securities devoid of futures be effectively hedged? If so, what is the best cross-hedging instrument? The study evaluates the efficacy of the cross-hedging strategy for small and medium investors interested in banking sector stocks devoid of futures using the market index, sectoral index and stock futures from the same sector. The risk mitigation ability of each portfolio is estimated for different trade horizons using near-month futures and spot prices. The optimal futures contract size for minimising risk exposure is calculated using the Diagonal BEKK GARCH model with a minimum-variance approach. The cross-hedging portfolio with BANK NIFTY futures performs consistently well in a longer trading horizon with higher hedging costs. A cross-hedging portfolio with single stock futures also shows an excellent risk reduction potential but is less expensive than other alternatives. Fundamental investors achieve risk reduction up to 53.74 per cent cross-hedging using BANK NIFTY futures. Investors can construct cross-hedging portfolios with a closely matching return profile and hold these positions for a longer trade horizon to achieve higher risk reduction.

Journal

Asia-Pacific Financial Markets – Springer Journals

Published: Mar 1, 2023

Keywords: Cross-Hedging; Derivatives; Equity Futures Market; Futures; Hedging Effectiveness; Optimal Hedge Ratio; Single stock futures

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