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Cross-Hedging Foreign Currency Risk: Empirical Evidence from an Error Correction Model

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  • Ghosh, Asim

Abstract

In this article, the traditional price change hedge ratio estimation method is extended by applying the theory of cointegration in the case of cross-hedging of spot exchange risk of the Belgian franc (BF), the Italian lira (IL), and the Dutch guilder (NG) with U.S. Dollar Index futures contracts. Previous studies ignore the last period's equilibrium error and short-run deviations. The findings of this study indicate that the hedge ratio estimated by the error correction method is superior to that obtained from the traditional method, as evidenced by the likelihood ratio test and out-of-sample forecasts. Hedgers will be able to control the risk of their portfolios more effectively at a lower cost. Copyright 1996 by Kluwer Academic Publishers

Suggested Citation

  • Ghosh, Asim, 1996. "Cross-Hedging Foreign Currency Risk: Empirical Evidence from an Error Correction Model," Review of Quantitative Finance and Accounting, Springer, vol. 6(3), pages 223-231, May.
    • Handle: RePEc:kap:rqfnac:v:6:y:1996:i:3:p:223-31
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    References listed on IDEAS

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    1. Ghosh, Asim, 1995. "The Hedging Effectiveness of ECU Futures Contracts: Forecasting Evidence from an Error Correction Model," The Financial Review, Eastern Finance Association, vol. 30(3), pages 567-581, August.
    2. Bruce A. Benet, 1990. "Commodity futures cross hedging of foreign exchange exposure," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 10(3), pages 287-306, June.
    3. Leland L. Johnson, 1960. "The Theory of Hedging and Speculation in Commodity Futures," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 27(3), pages 139-151.
    4. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, Decembrie.
    5. Stewart L. Brown, 1985. "A Reformulation of the Portfolio Model of Hedging," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(3), pages 508-512.
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    Cited by:

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    2. Markus Hang & Jerome Geyer-Klingeberg & Andreas W. Rathgeber & Clémence Alasseur & Lena Wichmann, 2021. "Interaction effects of corporate hedging activities for a multi-risk exposure: evidence from a quasi-natural experiment," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 789-818, February.
    3. Adams, Zeno & Gerner, Mathias, 2012. "Cross hedging jet-fuel price exposure," Energy Economics, Elsevier, vol. 34(5), pages 1301-1309.
    4. Ahmad Bash & Abdullah M. Al-Awadhi & Fouad Jamaani, 2016. "Measuring the Hedge Ratio: A GCC Perspective," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(7), pages 1-1, July.

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