Global markets are increasingly integrated, driven by the diversified global supply chain, deregulation of capital markets, and technological advances. The interconnection of global markets has been the key driver for co-movement of market returns, especially during periods of crisis. This has important consequences in terms of portfolio hedging and risk management.
Meanwhile, with the continued growth in exchange-traded derivatives supported by the need for increased price transparency and liquidity, investors have sought to efficiently integrate listed derivatives into their portfolios.
This paper presents the regional relevancy of S&P 500 and Dow Jones Industrial Average (DJIA) futures for hedging and risk management use by Asian investors. While the ecosystem around the S&P 500 and DJIA covers multiple areas, including trading of options, ETFs, mutual funds, etc., we are only capturing part of the complexity of Asian trading by limiting the study scope to futures. We evaluate the usefulness of those instruments through the following metrics.
- Liquidity: As shown by aggregate U.S. dollar notional total value traded for the futures contracts on the two U.S. benchmarks during Asian trading hours.
- Co-movements of markets: As measured by correlations between the two U.S. benchmarks and seven major Asian market benchmarks, based on daily returns of the futures prices at Asian end of day.
- Flexibility: As indicated by contract size and trading hours of the futures on the two U.S. benchmarks versus other major Asian market benchmarks.
The results suggested certain benefits of trading U.S. benchmarks in Asia, providing a new perspective on the use of index derivatives to meet the needs of Asian investors.