Have the Hedge Ratio and Hedge Effectiveness of Indian Stock Market Indices Changed After Covid-19 Pandemic? †

ABSTRACT

In a free capital flow environment with greater volatility, the requirement for an optimum hedge ratio and its efficiency will be justified in order to create a successful hedging strategy. Hedge effectiveness in the Indian market has been tested using derivative contracts of Nifty futures and Bank Nifty futures as to how they help protect the spot market investments. The study has been divided into pre- and post-pandemic periods, from February 16, 2016, to March 23, 2020, and from March 24, 2020, to September 2021. The study emphasizes on Ordinary Least Square (OLS), Bivariate Vector Autoregressive Regression (BVAR), Vector Error Correction Model (VECM) and Multivariate Generalized Autoregressive Conditional Heteroscedasticity (M-GARCH) models to determine the effectiveness of hedging strategies. The models OLS, BVAR and VECM identified that the post-sample hedge effectiveness exhibits a higher reduction in variance than the pre-sample hedge effectiveness. According to the MGARCH results, the depicted hedge ratios are capable of reducing risk during both pre- and post-Covid-19 pandemic periods. This implies that the post-pandemic hedge effectiveness is superior to the prepandemic hedge effectiveness and both the future indices were able to lower a large amount of risk in the unhedged portfolio by a significant amount. Thus, it can be concluded that time shifting hedge ratios of post-pandemic period are capable of delivering hedging effectiveness in terms of variance reduction in the short run.