Systematic risk, dividend yield and the hedging performance of stock index futures

✍ Scribed by Robert Jennings; David Graham

• Publisher: John Wiley and Sons
• Year: 1987
• Tongue: English
• Weight: 755 KB
• Volume: 7
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990070102

✦ Synopsis

e use random sampling techniques to form portfolios of common stocks so W that the portfolios differ in systematic risk and dividend yield. Using three hedge strategies (naive, beta and minimum-variance), we add short positions of the S&P 500 Stock Index futures contract to each equity portfolio. Overall, the minimum-variance hedge strategy was substantially better than the alternative strategies in preserving return, although there was less of an advantage in portfolios with low systematic risk. With respect to risk reduction, the minimum-variance hedging strategy offered the most improvement relative to the other strategies for high dividend yield equity portfolios. The relative hedging effectiveness of the minimumvariance hedge strategy declines as the length of the hedging period increases beyond two weeks.