conomic development of a country to a large extent is dependent on the smooth functioning of its financial markets. A financial market that is robust is expected to foster economic growth and social welfare (Singh, 1991). Financial markets pose a great risk to the investor's in spite of its high returns. The market risk can be reduced by portfolio insurance (Wikipedia). Derivative markets help in increasing the trading volume in financial markets because the objective of trading is not only for investment purposes but also for risk management objectives of market participants (Madhumathi & Ranganatham, 2012). Adams and Montesi, (1995) found that corporate managers prefer futures to options by virtue of the large transaction costs in option trading. Investors recognize that there is a close relationship between changes in the index and changes in the values of their portfolios. This makes index futures contract is used as a tool to show how movements in the market affects the value of a portfolio (Grant, 1982). Forecasting hedge ratio is important for hedgers in derivative market, as forecasting is an important tool in decision making. (Koenker & Bassett, 1978).

Hedge ratio can be determined with different models derived by econometrics -OLS, ARCH, GARCH and VECH models to name a few. Ederington (1979) and Johnson (1960) employed portfolio theory to derive the minimum variance hedge ratio (HR) as the "average relationship between the changes in the cash price and the changes in the futures price". Engle (1982) suggested ARCH model. If an autoregressive moving average model (ARMA model) is assumed for the error variance, then the model is known as generalized autoregressive conditional heteroskedasticity GARCH model (Bollerslev 1986).

Individual and institutional investors are exposed to equity risk. Predicting the movement of market is not an easy task as rightly proved by the Nobel laureate (Eugene Fama, 2013Fama, & 1966)). Stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. In order to minimize the risk due to the adverse movement in the market there is a need for the investors to protect their portfolio value. For investors in India it is even more challenging as the volatility in Indian market is not constant and it varies over time (Securities and Exchange Board of India, 1998). Mary & Vishwanath, (2013) proved that in high PE stock portfolios, capital can be protected by hedging. With this bckground, this research examines whether hedging the portfolio with Index futures gives economic benefit to the investors.

II.

The research is done with only secondary data obtained from periodicals, journals, website and magazines. Period of study is from January 2008 -December 2012 and daily stock and nifty index futures closing prices were taken. 2007 data is used for determining the hedge ratio.

Based on prefixed parameter ten High Market cap stocks are drawn from the population using a non probability sampling technique, judgement sampling method. The sample consists of 10 stocks constituting a portfolio worth 1 crore (10 million) rupees. Each stock is given an equal weightage of rupees 10 lakhs (1 million) worth.

Hedging Effectiveness Analysis of High Market Cap Indian Stocks Using OLS and GARCH Hedge Ratios As on 1/1/2008 the portfolio was constructed for 1 crore rupees by giving equal weightage of 10 lakhs (1 million) rupees to each stock. Number of shares bought for a value of 10 lakhs for each stock is as follows:

ii. Hedged Portfolio return

The number of nifty futures contract required to hedge the portfolio worth Rupees 1 crore is determined by calculating the hedge ratio. In this study hedge ratio is obtained using two different econometric methods i) Ordinary Least squares -OLS ii) GARCH , and the results are compared to find out the method which gives better returns.

The hedge ratio for 2/1/2008 is calculated using previous one year data i.e daily closing price of stock and closing price of nifty index futures from 1/1/2007 to 31/12/2007. Hedge ratio is calculated for every 3 months. So, for each stock every year hedge ratio is determined 4 times and for the total period of study it was determined 20 times for rebalancing of the portfolio. Likewise, hedge ratios were calculated for all the stocks in each sample set based on two methods OLS and GARCH with the help of Eviews software.

Hedge ratio calculation:

where ?S is the standard deviation of ?S, the change in the spot price during the hedging period, standard deviation of ?F, the change in the futures price during the hedging period, ? is the coefficient of correlation between ?S and ?F.

Rebalancing is done every three months to adjust the number of contracts to be hedged and the trading profit is calculated. Number of contracts to be hedged: Vp x h* / Vi Vp -Value of the portfolio. h* -Hedge ratio. Vi -Value of one index future.

The portfolio value without hedging and the hedged portfolio value is compared to prove the hedging effectiveness. For proving this statistical tests are done with the help of SPSS software.

Ho : There is no significant difference between the Mcap OLS hedged portfolio returns and GARCH hedged portfolio returns. H1: There is a significant difference between the Mcap OLS hedged portfolio returns and GARCH hedged portfolio returns.

Indian equity investors can hedge their portfolio with nifty index futures as hedging reduces loss to a great extent based on this study. Even during the worst of times hedged portfolio value remains unscathed compared to the unhedged open portfolio. Use of complex heteroscedastic models are discouraged as simple OLS model is giving better results than complex heteroscedasticity GARCH models as observed. Even when there are differences in performance, they are very minimal which can be ignored. It can be noticed that when a portfolio is hedged it can withstand harsh bearish conditions like that of 2008 crash.

Though we have ignored the transaction cost it can affect the portfolio performance if more churning is done or if the transaction costs are prohibitive. However in the current low cost (brokerage) scenario the impact of transaction cost will be minimal in the Indian context. Fund managers can use either fundamental factors or technical tools to decide when to hedge the portfolio. This study is useful for Investors in selecting the right kind of stocks for the portfolio. In this study it is proved that high Mcap stocks can be hedged effectively using index hedging. Investors can invest in high Mcap stocks as they provide the best appreciation even during uncertain periods and hedging is very effective.

The research proves that the equity risk of a portfolio can be offset by hedging the portfolio with nifty index futures. The hedged value determined based on OLS (Ordinary least squares) method is high for Market Cap stock portfolios than GARCH (Generalized autoregressive conditional heteroscedasticity) model. So, the traditional simple OLS model is preferable to complex GARCH model in calculating hedge ratio/beta. During periods of financial crisis like 2008-2009 maximum loss covered by hedging the portfolio is up to 68%. The protection of a portfolio through hedging should not encourage investors to use it indiscriminately for unwarranted situations. Only Unhedged portfolio can fulfill the objective of the portfolio by giving good returns. Hedging should be used as an anchor in a sailing ship charting risky waters. Hence use of hedging should be restricted to special situations where there is an inherent risk of market crash and the portfolio should be unhedged under normal circumstances. This spring's another question; when to hedge or whether to hedge or not?. This situation is a tricky one as further research is needed to find out the suitability of stop loss or other models to initiate hedging. Both fundamental and technical analysis tools may be employed to arrive at the decision.