Hedging Effectiveness Stock Index Futures Market: An Analysis on Malaysia and Singapore Futures Markets

This research investigates the hedging effectiveness of stock index futures markets in Malaysia and Singapore by employing various hedge ratio estimation methods, which comprises of the conventional OLS model, VECM, EGARCH and bivariate GARCH. The empirical results indicate that the Kuala Lumpur Futures Index (KLFI) provides higher hedging effectiveness compared to the Straits Times Index (STI) futures for OLS, VECM and EGARCH, but not for bivariate GARCH, which STI futures indicates higher hedging effectiveness. It is also shown that the KLFI provides more effective hedge for all hedge ratio estimation models compared to STI. The results also indicate that the OLS model performs most effectively in both index futures markets, followed by EGARCH. Thus, based on the findings, the OLS model could serve as a better hedging model than other static and time-varying models in a direct hedge using stock index futures. The evidence presented in this study strongly suggests that the KLFI and STI stock index futures contracts are effective tool for hedging risk, which is consistent with most of the earlier studies in index futures.