Hostname: page-component-7dd5485656-k8lnt Total loading time: 0 Render date: 2025-10-31T22:05:31.853Z Has data issue: false hasContentIssue false
  • English
  • Français

Hedging with Mispriced Futures

Published online by Cambridge University Press:  06 April 2009

John J. Merrick Jr
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper analyzes the correspondence between arbitrage sector pricing efficiency and the short-term hedging costs and effectiveness of futures contracts. Reversals of initial contract mispricings by arbitrage sector trading leads to an important mispricing return component in the total return to hedge portfolios. The existence of the mispricing return has implications for initial hedge ratio selection, hedging effectiveness, and expected hedge return. The analysis is used to interpret the hedge ratio guidance and performance of short-term hedges between the Standard and Poor's 500 stock index futures contract and the underlying S&P 500 cash stock index portfolio over the 1982–1986 period.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 4 , December 1988 , pp. 451 - 464
Copyright
Copyright © School of Business Administration, University of Washington 1988

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Anderson, R., and Danthine, J.-P.. “Cross-Hedging.” Journal of Political Economy, 89 (12 1981), 1182–1196.CrossRefGoogle Scholar
Cornell, B., and French, K.. “Taxes and the Pricing of Stock Index Futures.” Journal of Finance, 38 (06 1983), 675–694.CrossRefGoogle Scholar
Ederington, L. “The Hedging Performance of the New Futures Markets.” Journal of Finance, 34 (03 1979), 157–170.CrossRefGoogle Scholar
Figlewski, S. “Hedging Performance and Basis Risk in Stock Index Futures.” Journal of Finance, 39 (07 1984), 657–669.CrossRefGoogle Scholar
Johnson, L. “The Theory of Hedging and Speculation in Commodity Futures.” Review of Economic Studies, 27 (1960), 139–151.CrossRefGoogle Scholar
Merrick, J. “Volume Determination in Stock and Stock Index Futures Markets: An Analysis of Arbitrage and Volatility Effects,” Journal of Futures Markets, 7 (10 1987a), 483–496.CrossRefGoogle Scholar
Merrick, J. “Price Discovery in the Stock Market.” Working Paper No. 416, Salomon Brothers Center for the Study of Financial Institutions, New York Univ. (04 1987b).Google Scholar
Modest, D., and Sundaresan, M.. “The Relationship between Spot and Futures Prices in Stock Index Futures Markets: Some Preliminary Evidence.” Journal of Futures Markets, 3 (Spring 1983), 15–41.CrossRefGoogle Scholar
Stein, J. “The Simultaneous Determination of Spot and Futures Prices.” American Economic Review, 51 (12 1961), 1012–1025.Google Scholar
Stoll, H., and Whaley, R.. “Expiration Day Effects of Index Options and Futures.” Monograph Series in Finance and Economics, Salomon Brothers Center for the Study of Financial Institutions, New York Univ., No. 1986–3.Google Scholar
Working, H. “New Concepts Concerning Futures Markets and Prices.” American Economic Review, 52 (05 1962), 431–459.Google Scholar