Núm. 53 (2020)

Optimal Hedge Ratios for the Mexican Stock Market Index Futures Contract: A Multivariate GARCH Approach

Roberto J. Santillán-Salgado
Universidad Nacional Autónoma de México
Luis Jacob Escobar
Tecnológico de Monterrey, Campus Monterrey
Francisco López-Herrera
Universidad Nacional Autónoma de México
Publicado julio 31, 2020


This work compares different hedging strategies that use the Mexican Stock Exchange (MSE) Index futures contract traded at the Mercado Mexicano de Derivados – (Mexican Derivatives Market or MexDer), to minimize the impact of stock price fluctuations on the value of a well-diversified portfolio (the Mexican Stock Exchange Index, or IPC). We study the ex-post empirical performance of each using the daily closing contract’s price and the MSE Index for a period from December 30th, 1999, through December 30th, 2016. The set of hedging strategies we compare includes: a) a No-hedge strategy; b) a Naive hedge ratio (1 to 1); c) a constant hedge ratio, (obtained from an OLS); and d) a dynamic hedge ratio, obtained using a Constant Conditional Correlation Bivariate GARCH model, with Asymmetric Responses.  Moreover, the sample period has four structural breaks, so the analysis is divided in five subperiods. The different strategies are compared using different risk measures: Value at Risk, Expected Shortfall and LAQ. In all cases, hedging effectively reduces the volatility of the portfolio, but the dynamic hedge ratio produces the best possible results, while the constant hedge ratio is a close second.


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