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Extending the work of Ederington(1979) and Anderson and
Danthine (1981), we examine the problem of hedging multi-
assets with multi-futures contracts under discretionary hedging
theory. Chapter 2 discuss the measure of hedging contribution
through canonical correlation analysis from the market point of
view. Upon deriving the hedging effectiveness, a test
statistic and its asymptotic distribution is derived through
Monte Carlo simulation to measure the significance of the
contribution of a new futures contract. In chapter 3, a
generalized measure of hedging effective- ness under the
multiple spots and multiple futures framework is proposed. It
is shown that any affine transformation of futures contracts
does not affect the hedging potential. However, affine
transformation of spot assets does change the hedging
effectiveness. Two other different hedging analysis for the
multiple spots and futures framework are also examined, and the
redundancy hedging analysis seems to be an excellent one. The
short run dynamics and long run equilibrium relation- ship
between spots and futures are studied in chapter 4. A dynamic
nonlinear error correction mechanism for spot and futures
prices under cointegration is proposed to capture the time
varying information set. An emperical model obtained from the
econometric methodology for S&P500 and New York composite index
and index futures has shown the superiority of the proposed
procedure.
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