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Are regression approach futures hedge ratios stationary?

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  • Robert Ferguson
  • Dean Leistikow

Abstract

In contrast to some recent research, this article finds that regression approach futures hedge ratios are stationary. It shows that a previous study's failure to reject the random walk null hypothesis was due to its small sample size and the overlapping hedge ratio calculation approach's bias toward accepting the random walk hypothesis. The impact of overlap on the Dickey‐Fuller full model intercept and slope estimates is demonstrated analytically and numerically. Finally, the article shows that out‐of‐sample hedging performance is not significantly improved by updating the hedge ratios. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:851–866, 1998

Suggested Citation

  • Robert Ferguson & Dean Leistikow, 1998. "Are regression approach futures hedge ratios stationary?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(7), pages 851-866, October.
    • Handle: RePEc:wly:jfutmk:v:18:y:1998:i:7:p:851-866
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    Cited by:

    1. Joost M.E. Pennings & Raymond M. Leuthold, 1999. "Futures Exchange Innovations: Reinforcement versus Cannibalism," Finance 9905003, University Library of Munich, Germany.
    2. Stavros Degiannakis & Christos Floros & Enrique Salvador & Dimitrios Vougas, 2022. "On the stationarity of futures hedge ratios," Operational Research, Springer, vol. 22(3), pages 2281-2303, July.
    3. Pennings, Joost M. E. & M. Leuthold, Raymond, 2001. "Introducing new futures contracts: reinforcement versus cannibalism," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 659-675, October.
    4. Mark Manfredo & Timothy Richards, 2009. "Hedging with weather derivatives: a role for options in reducing basis risk," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 87-97.
    5. Gurmeet Singh, 2017. "Estimating Optimal Hedge Ratio and Hedging Effectiveness in the NSE Index Futures," Jindal Journal of Business Research, , vol. 6(2), pages 108-131, December.

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