Hedge Ratio and Correlation between the Stock and the Futures Markets: Evidence from the Wavelet Analysis

36 Pages Posted: 30 May 2003

See all articles by Sangbae Kim

Sangbae Kim

Kyungpook National University - School of Business Administartion

Francis Haeuck In

Monash University - Department of Accounting; Financial Research Network (FIRN)

Abstract

This paper examines the relationship between the stock and the futures return over the various time horizons. In contrast to previous studies, wavelet analysis allows us to decompose the data into various time scales. Using this technique, we find that in the short- and long-run, there is a feedback relationship, while in the intermediate-run, the futures market leads the stock market. The correlation between the two markets varies over time but remains very high. Furthermore, the magnitude of the correlation increases as the time scale increases, indicating that the stock market and the futures market of the All Ordinaries Index are found to be not fundamentally different. The hedge ratio increases as the time scale increases. In other words, the effectiveness of the hedging strategies initially increases with the hedging horizon.

Suggested Citation

Kim, Sangbae and In, Francis Haeuck, Hedge Ratio and Correlation between the Stock and the Futures Markets: Evidence from the Wavelet Analysis. Available at SSRN: https://ssrn.com/abstract=393200 or http://dx.doi.org/10.2139/ssrn.393200

Sangbae Kim

Kyungpook National University - School of Business Administartion ( email )

Daegu 702-701, Taegu
Korea, Republic of (South Korea)
+82 53 950 7413 (Phone)
+82 53 950 6247 (Fax)

Francis Haeuck In (Contact Author)

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia
+61 3 9905 1561 (Phone)
+61 3 9905 5475 (Fax)

Financial Research Network (FIRN)

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