Realised hedge ratio properties, performance and implications for risk management: evidence from the spanish ibex 35 spot and futures markets

Resumen

This paper analysis the properties and performance of daily realised futures hedge ratios. Using five-minute data for the Spanish IBEX-35 equity spot and futures market realised variances, covariances and hedge ratios are constructed. To measure performance we compared a hedged portfolio based upon the realised hedge ratio with hedged portfolios constructed using a constant regression based hedge ratio, a timevarying rolling regression hedge ratio favoured within the finance industry and a timevarying bivariate-GARCH hedge ratio favoured within the academic community. Our results suggest that solely in terms of minimising portfolio variance the static regression, rolling regression and GARCH based methods obtain the smallest portfolio variances; however, this was often at the expense of negative mean values. In contrast, measuring performance that takes into account portfolio mean and variance using the Sharpe ratio, the portfolio based on the realised hedge ratio is almost unanimously favoured.