Jumping with the dividends: Hedging European Market Risk with EuroStoxx 50 Index Futures Contracts

Abstract

This study investigates the effectiveness of different hedging strategies, given the large rollover jumps of EuroStoxx 50 futures contracts. Applying a variety of optimal strategies, we show that simpler constant hedge ratios outperform more sophisticated time-varying models, even when adapting to the presence of such rollover jumps. These jumps distinguish EuroStoxx 50 futures from other popular futures contracts and are due to (discounted) dividends usually paid between March and June of each year. Our study is therefore of major interest to all investors who want to manage their exposure to European market risk with the most liquid instrument available: EuroStoxx 50 futures.

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