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Conditional OLS minimum variance hedge ratios

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  • Joëlle Miffre

Abstract

The paper presents a new methodology to estimate time dependent minimum variance hedge ratios. The so‐called conditional OLS hedge ratio modifies the static OLS approach to incorporate conditioning information. The ability of the conditional OLS hedge ratio to minimize the risk of a hedged portfolio is compared to conventional static and dynamic approaches, such as the naïve hedge, the roll‐over OLS hedge, and the bivariate GARCH(1,1) model. The paper concludes that, both in‐sample and out‐of‐sample, the conditional OLS hedge ratio reduces the basis risk of an equity portfolio better than the alternatives conventionally used in risk management. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:945–964, 2004

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  • Joëlle Miffre, 2004. "Conditional OLS minimum variance hedge ratios," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(10), pages 945-964, October.
    • Handle: RePEc:wly:jfutmk:v:24:y:2004:i:10:p:945-964
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    Cited by:

    1. Cifarelli, Giulio & Paladino, Giovanna, 2015. "A dynamic model of hedging and speculation in the commodity futures markets," Journal of Financial Markets, Elsevier, vol. 25(C), pages 1-15.
    2. Cotter, John & Hanly, Jim, 2015. "Performance of utility based hedges," Energy Economics, Elsevier, vol. 49(C), pages 718-726.
    3. Hsiu‐Chuan Lee & Cheng‐Yi Chien & Tzu‐Hsiang Liao, 2009. "Determination of stock closing prices and hedging performance with stock indices futures," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(4), pages 827-847, December.

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