Cross-Hedging Portfolios in Emerging Stock Markets: Evidence for the LATIBEX Index

Abstract

We consider alternative possibilities for hedging spot positions on the FTSE LATIBEX Index, the index of the only international market exclusively for Latin American firms that is denominated by the euro. Since there is not a futures market on the index, it is unclear whether a relatively successful hedge can be found. We explore the plausibility of employing futures on four stock market indices: EUROSTOXX 50, S&P500, BOVESPA, and IPC, and simulate the results that could be obtained by a hedge position based on either unconditional or conditional second order moments estimated from different asymmetric GARCH models. Several criteria for hedging effectiveness suggest that futures contracts on BOVESPA should be preferred, and that a salient reduction in risk can be achieved over the unhedged LATIBEX portfolio. The evidence in favor of a better performance of conditional moments is very clear, without significant differences among the alternative GARCH specifications.

Keywords

• cross-hedging
• futures markets
• hedging efficiency
• asymmetric multivariate GARCH models