OPTIMAL HEDGE RATIO & HEDGING EFFECTIVENESS USING FUTURES CONTRACT:EVIDENCE FROM INDIA

2019-07-19T07:46:10Z (GMT) by BHAUMIK KANSARA
A]INTRODUCTION: The failure of 1:1 position encouraged for the determination of optimal proportion to be invested in spot & future market and for that study carried out by analyzing three competing models namely, Ordinary Least Squares (OLS), Vector Autoregression Model (VAR), and Generalized Autoregressive Conditional Heteroscedasticity model (GARCH) to address out optimal hedge ratio and hedging effectiveness. The Econometric Augmented Dickey fuller (ADF) test used to assess the stationarity of data. B] FINDINGS: The findings indicates that ADF test performed & all the data were stationary as all the data value of test statistics is greater than the critical value. Hence we can go for further application of models. The outcome for CNX nifty after applying all these models reveals that by comparing the 3 models, VAR model has generated highest variance reduction of 2.2188% as compared all other models. So the investor should go for the proportion provided by VAR model as it provides maximum loss reduction with highest variance reduction. But the highest loss has been reduced about 27.8175% by the proportion provided by GARCH model. The GARCH model has reduces minimum variance as compared to other models but the intensity of return is much higher than any other model with little higher risk. The final findings for INFOSYS after applying all these models reveals that by comparing the 3 models VAR & OLS model has generated highest variance reduction of 0.5014% as compared all other models. So the investor should go for the proportion provided by VAR & OLS model as it provides maximum possible loss reduction with highest variance reduction if they want to hedge using INFOSYS. Here the VAR model has reduced highest variance reduction of 0.5014% and simultaneously given highest loss reduction of 4.7559% as compared to other models. C] SUGGESTIONS AND RECOMMENDATIONS: Finally I would like to made suggestion for CNX Nifty that investors who do not concerns for risk or low risk averse should go for the proportion provided by GARCH model as it generates highest loss reduction (gain) by bearing little more risk but the intensity for return is too high so risk taker investor should prefer the ratio provided by GARCH model. Highly risk averse investors should prefer the ratio provided by VAR model as it gives highest variance reduction than any other model. For the INFOSYS I would like to recommend to investors or corporate to prefer the proportion given by VAR model as it offers two way outcome by way of investing through the ratio provided by VAR model it generates highest loss reduction (gain) and simultaneously gives highest variance reduction as compared to other model. D] CONCLUSION: My outcome totally contradicts to foreign researchers as they says that GARCH model generates highest variance reduction in 1 day horizon but my outcome indicates that VAR model generates highest variance reduction as compared to any other model in 1 day horizon.

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CC BY 4.0