TABLE OF CONTENTS The objective of this paper is to estimate the hedge ratios of foreign-listed single stock futures (SSFs) and to compare the performance of risk reduction of different methods. The OLS method and a bivariate GJR-GARCH model are employed to estimate constant optimal hedge ratios and the dynamic hedging ratios, respectively. Data of the SSFs listed on the London International Financial Future and Options Exchange (LIFFE) are used in this research. We find that the data series have high estimated constant optimal hedge ratios and high constant correlation in the bivariate GJR-GARCH model, except for three SSFs with their underlying stocks traded in Italy. Our findings provide evidence that distance is a critical factor when explaining investor's trading behavior. Results also show that in general, of the three methods examined (i.e., na ve hedge, conventional OLS method and dynamic hedging) the dynamic hedging performs the best and that na ve hedge is the worst.
Keywords: Hedging; GJR-GARCH; hedge ratios; SSFs; single stock futures; LIFFE; USFs.
Since the trading of futures has become more frequent in recent years, there has been much attention given to the issue of hedging with futures.
Many studies have dealt with the issue of hedging with various futures, such as commodity futures, currency futures, index futures, and so on (e.g., Baillie and Myers, 1991; Kroner and Sultan, 1993; Park and Switzer, 1995, respectively). However, studies on hedging...
