Negative Correlation between Stock and Futures Returns: An Unexploited Hedging Opportunity?

Basu, P.; Gavin, W.T.

Abstract

The negative correlation between equity and commodity futures returns is widely perceived by investors as an unexploited hedging opportunity. A Lucas (1982) asset-pricing model is adapted to analyse the fundamentals driving equity and commodity futures returns. Using the model we argue that such a negative correlation could arise as an equilibrium relationship which reflects traders' perceptions about the shocks driving the fundamentals such as energy and consumables, and does not necessarily indicate any hedging opportunity.

Citation

Basu, P., & Gavin, W. (2016). Negative Correlation between Stock and Futures Returns: An Unexploited Hedging Opportunity?. Bulletin of Economic Research, 69(3), 209-215. https://doi.org/10.1111/boer.12090

• Journal Article Type: Article
• Acceptance Date: Apr 16, 2016
• Online Publication Date: Jun 14, 2016
• Publication Date: Jun 14, 2016
• Deposit Date: Apr 25, 2016
• Publicly Available Date: Jun 14, 2018
• Journal: Bulletin of Economic Research
• Print ISSN: 0307-3378
• Electronic ISSN: 1467-8586
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 69
• Issue: 3
• Pages: 209-215
• DOI: https://doi.org/10.1111/boer.12090
• Public URL: https://durham-repository.worktribe.com/output/1406191