The Mib30 index and futures relationship: econometric analysis and implications for hedging

The interactions between the Mib30 stock market index and its future contract are examined. Using daily data for the 1994–2002 period, it is found that the cost-of-carry model holds as an equilibrium relationship between spot and futures prices. Deviations from equilibrium are corrected by movements in the spot market, but cross-market dynamics are also important in the short run. We model the time varying volatility of daily returns’ as an autoregressive conditional heteroscedastic process; this model used to estimate minimum-variance hedge ratios. In- and out-ofsample comparisons with static hedging show that, by carefully choosing the ARCH specification, a significant improvement in variance reduction can be achieved.