HEDGING WITH THE NIKKEI INDEX FUTURES - THE CONVENTIAL MODEL VERSUS THE ERROR-CORRECTION MODEL

This study estimates and compares the hedge ratios of the conventional and the error correction models using Japan's Nikkei Stock Average (N SA) index and the NSA index futures with different time intervals. Com parisons of out-of-sample hedging performance reveal that the error co rrection model outperforms the conventional model, suggesting that the hedge ratios obtained by using the error correction model do a better job in reaching the risk of the cash position than those from the con ventional model. In addition, this paper evaluates the effects of temp oral aggregation on hedge ratios. It is found that temporal aggregatio n has important effects on the hedge ratio estimates.