Effectiveness of a Time-Varying Hedge Ratio : Evidence from NSE Stock Index Returns

There is no dearth of research in the area of Optimal Hedge Ratio estimation. The general consent goes towards use of Multivariate Generalized Autoregressive Conditionally Heteroscedastic (MGARCH) model because of superior outcomes having low portfolio volatilities over other models (like: OLS hedge and time-invariant hedge models). The general market condition of future and spot market provides information that news about future and spot prices arrives to the market place in discrete bunches. Hence, time varying model is expected to provide the optimal hedge ratio.A model was developed taking two sets of data, daily data of NSE stock Index Future and S & P CNX NIFTY Index for the period 2001-2006. For sample validation, data from January 2007 to February 2007 has been considered. The result shows improvement over static hedge ratio, which provides an evidence of effectiveness of time-variant hedge model