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The Economic Value of Minimum-Variance Hedges

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Author Info
Lence, Sergio

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Abstract

The present article examines the potential economic gains from "better" minimum-variance hedge (MVH) estimates, focusing on the assumptions that yield MVHs consistent with expected-utility maximization. It is found that the economic value of "better" MVH estimates is negligible, and that optimal hedges are substantially different from MVHs when the usual MVH restrictions are relaxed. Among other things, findings suggest that the hedging research's recent emphasis on "better" MVHs has been a waste of resources. Investigating the consequences of relaxing the standard MVH assumptions seems to be much more important than recent literature contributions.

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Publisher Info
Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 5053.

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Date of creation: 01 Mar 2002
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Publication status: Published in American Journal of Agricultural Economics, May 1995, Vol. 77, No. 2, pp. 353-364.
Handle: RePEc:isu:genres:5053

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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  1. Tonsor, Glynn T., 2008. "Hedging in Presence of Market Access Risk," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37621, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. [Downloadable!]
  2. Frechette, Darren L., 2000. "Hedging With Futures And Options: A Demand Systems Approach," 2000 Conference, April 17-18 2000, Chicago, Illinois 18941, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. [Downloadable!]
  3. Haigh, Michael S. & Holt, Matthew T., 1999. "Volatility Spillovers Between Foreign Exchange, Commodity And Freight Futures Prices: Implications For Hedging Strategies," 1999 Annual meeting, August 8-11, Nashville, TN 21625, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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  4. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  5. Frechette, Darren & Tuthill, Jonathan W., 2000. "Weighted Expected Utility Hedge Ratios," 2000 Conference, April 17-18 2000, Chicago, Illinois 18931, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. [Downloadable!]
  6. Lee, Sang-Hak & Yang, Seung-Ryong, 2000. "The Minimum Semi-Variance Hedge For Food Manufacturers In Korea," 2000 Annual meeting, July 30-August 2, Tampa, FL 21867, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  7. Garcia, Philip & Nelson, Carl H., 2003. "Engaging Students In Research: The Use Of Structured Professional Dialogue," 2003 Annual meeting, July 27-30, Montreal, Canada 21894, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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