On the stationarity of futures hedge ratios

Stationarity of hedge ratios can be viewed as a first step for portfolio hedging since it represents that the sensitivity of spot and Future returns follow a process whose main characteristics do not depend on time. However, we provide evidence that the hedge ratios of the main European stock indices are better described as a combination of two different mean-reverting stationary processes, which depend on the state of the market. Also, when analysing the dynamics of hedge ratios at intraday level, results display a similar picture suggesting that intraday dynamics of the hedge between spot and Future are driven mainly by market participants with similar perspectives of the investment horizon.