An empirical study on optimal hedge ratio and hedging effectiveness of Nifty IT Index Stocks

Abstract

The hedging strategy is effective when the hedging Derivatives instruments prices are offsetting the volatile Spot prices. To reduce the risk produced in the volatile Spot prices, the present study has analysed the efficiency of NIFTY IT Stocks Futures. The Four econometrics models, two are constant hedge models and two are time-varying hedge models are employed for the Near, Next and Far month Futures contracts for the data span period from January 2011 to July 2017. From the selected model it has found that overall for hedge ratio and hedging effectiveness VECM (Vector Error Correction Model) constant hedge model has performed better over other constant and time varying hedge models. To hedge the risk the best IT Stock, Infosys Stock can be used by investors. To hedge the one unit of Spot position Infosys Stock has concluded with more than one unit of Futures value for Near, Next and Far month contract as compare to other Stocks. The hedging effectiveness of Infosys Stock under selected models is seen in most of the instances higher than other Stocks of NIFTY IT Index.