Minimum variance hedge ratio analysis for the South African share index futures market: Duration and expiration effects

Abstract

ABSTRACTThe minimum variance hedge ratio (HR*) and the classic or beta hedge ratio are commonly used decision rules in drawing up a hedging strategy. Research regarding the superiority between HR* and the beta hedge ratio that had been done on the US market has yielded mixed results.This study investigates the stability of HR* for the Johannesburg Stock Exchange All Share, All Gold and Industrial Indices futures contracts with respect to hedge duration and time to contract expiration. Hedge durations of one, two and four weeks are compared, and these are further subdivided into the number of weeks remaining until contract expiration. The HR* values are analysed for predictable trends, and statistical comparisons are made with the beta hedge ratio.The results show that the minimum variance hedge ratios are significantly less than the beta hedge ratio of 1, and that they increase as hedge duration increases from one to four weeks. The results also show that, in general, the HR* values increase, although onl...