Optimal Hedge Ratio and Hedging Effectiveness in Turkish Stock Index Futures Market

Gök İ. Y.

EGE ACADEMIC REVIEW, vol.16, pp.719-732, 2016 (ESCI) identifier

  • Publication Type: Article / Article
  • Volume: 16
  • Publication Date: 2016
  • Journal Indexes: Emerging Sources Citation Index (ESCI), TR DİZİN (ULAKBİM)
  • Page Numbers: pp.719-732
  • Süleyman Demirel University Affiliated: Yes


In this study, optimum hedge ratio and hedging effectiveness of Turkish index futures market are investigated and five different hedging horizons including daily hedging and one, two, three, and four weeks hedging are examined. In the study, six different models including ordinary least squares (OLS), error correction model (ECM), generalized autoregressive conditional heteroskedasticity (GARCH) model, ECM-GARCH model and from multivariate GARCH models diag VECH-GARCH and diag BEKK-GARCH models are applied and daily spot and futures data of BIST 30 index in the period of November 1, 1995 and October 30, 2014 is used. While the best hedge ratio for daily hedging is provided by ECM-GARCH model, for the other hedge horizons the best hedge ratios are provided by multivarite GARCH models. In the view of risk-return hedging performance, although OLS model has the best performance in two and four week hedging horizons, for the other hedging horizons the best model differentiates. Also, hedging performance increases with extending the hedging horizon. In the perspective of these findings, it is concluded that though the performances of the models are close to each other and it is not reached one best model, BIST 30 index contracts are effective hedging instruments. In the view of riskreturn trade off, investors can benefit with the best performance by the proper model for the preferred hedging horizon.