International Hedge Ratios for Index Futures Market: A Simultaneous Equations Approach

The main purpose of this paper is to investigate hedge ratios in terms of the international index futures markets. Instead of looking at hedging in a single market, we construct a simultaneous equations system to study the index hedging in the light of the cross-country linkage and interaction. The three-stage least squares (3SLS) estimating procedure is then applied to CAC40 and FTSE100 indices over the period 1990–2008. The empirical results indicate that the cross-country hedging strategy in both markets is feasible and the investors can bring down the holding position in own futures market. Moreover, the hedging effectiveness of cross-country hedging strategy performs better than the traditional single market hedging strategy in terms of the percentage reduction in variance.