Hedge Effectiveness Forecasting
AbstractThis study focuses on hedging effectiveness defined as the proportionate price risk reduction created by hedging. By mathematical and simulation analysis we determine the following: (a) the regression R2 in the hedge ratio regression will generally overstate the amount of price risk reduction that can be achieved by hedging, (b) the properly computed hedging effectiveness in the hedge ratio regression will also generally overstate the amount of risk reduction that can be achieved by hedging, (c) the overstatement in (b) declines as the sample size increases, (d) application of estimated hedge ratios to non sample data results in an unbiased estimate of hedging effectiveness, (e) application of hedge ratios computed from small samples presents a significant chance of actually increasing price risk by hedging, and (f) comparison of in sample and out of sample hedging effectiveness is not the best method for testing for structural change in the hedge ratio regression.
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Bibliographic InfoPaper provided by NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2008 Conference, April 21-22, 2008, St. Louis, Missouri with number 37604.
Date of creation: 2008
Date of revision:
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out of sample; post sample; hedging; effectiveness; forecasts; simulation; Agricultural Finance;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-14 (All new papers)
- NEP-FOR-2008-12-14 (Forecasting)
- NEP-RMG-2008-12-14 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rahman, Shaikh Mahfuzur & Turner, Steven C. & Costa, Ecio de Farias, 2000.
"Cross-Hedging Cottonseed Meal,"
2000 Annual meeting, July 30-August 2, Tampa, FL
21769, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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