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Estimation of the Optimal Futures Hedge

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  • Cecchetti, Stephen G
  • Cumby, Robert E
  • Figlewski, Stephen

Abstract

Standard approaches to designing a futures hedge often suffer from two major problems. First, they focus only on minimizing risk, so no account is taken of the impact on expected return. Second , in estima ting the hedge ratio, no allowance is made for time variation in the distribution of cash and futures price changes. This paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging Treasury bonds with T-bond futures. Copyright 1988 by MIT Press.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 70 (1988)
Issue (Month): 4 (November)
Pages: 623-30

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Handle: RePEc:tpr:restat:v:70:y:1988:i:4:p:623-30

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Web page: http://mitpress.mit.edu/journals/

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Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

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