Calculating the optimal hedge ratio: constant, time varying and the Kalman Filter approach
AbstractA crucial input in the hedging of risk is the optimal hedge ratio - defined by the relationship between the price of the spot instrument and that of the hedging instrument. Since it has been shown that the expected relationship between economic or financial variables may be better captured by a time varying parameter model rather than a fixed coefficient model, the optimal hedge ratio, therefore, can be one that is time varying rather than constant. This study suggests and demonstrates the use of the Kalman Filter approach for estimating time varying hedge ratio - a procedure that is statistically more efficient and with better forecasting properties.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Economics Letters.
Volume (Year): 13 (2006)
Issue (Month): 5 ()
Contact details of provider:
Web page: http://www.tandfonline.com/RAEL20
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Gupta, R. & Donleavy, G.D., 2009. "Benefits of diversifying investments into emerging markets with time-varying correlations: An Australian perspective," Journal of Multinational Financial Management, Elsevier, vol. 19(2), pages 160-177, April.
- John Hua Fan & Eduardo Roca & Alexandr Akimov, 2010. "Hedging With Futures Contract: Estimation and Performance Evaluation of Optimal Hedge Ratios in the European Union Emissions Trading Scheme," Discussion Papers in Finance finance:201009, Griffith University, Department of Accounting, Finance and Economics.
- Lubnau, Thorben, 2014. "Spread trading strategies in the crude oil futures market," Discussion Papers 353, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
- Pok, Wee Ching & Poshakwale, Sunil S. & Ford, J.L., 2009. "Stock index futures hedging in the emerging Malaysian market," Global Finance Journal, Elsevier, vol. 20(3), pages 273-288.
- Abdulnasser Hatemi-J & Eduardo Roca, 2010. "Estimating Optimal Hedge Ratio with Unknown Structural Breaks," Discussion Papers in Finance finance:201010, Griffith University, Department of Accounting, Finance and Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.