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An empirical analysis of the relationship between hedge ratio and hedging horizon using wavelet analysis

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  • Donald Lien
  • Keshab Shrestha

Abstract

In this article, optimal hedge ratios are estimated for different hedging horizons for 23 different futures contracts using wavelet analysis. The wavelet analysis is chosen to avoid the sample reduction problem faced by the conventional methods when applied to non‐overlapping return series. Hedging performance comparisons between the wavelet hedge ratio and error‐correction (EC) hedge ratio indicate that the latter performs better for more contracts for shorter hedging horizons. However, the performance of the wavelet hedge ratio improves with the increase in the length of the hedging horizon. This is true for both within‐sample and out‐of‐sample cases. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:127–150, 2007

Suggested Citation

  • Donald Lien & Keshab Shrestha, 2007. "An empirical analysis of the relationship between hedge ratio and hedging horizon using wavelet analysis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(2), pages 127-150, February.
  • Handle: RePEc:wly:jfutmk:v:27:y:2007:i:2:p:127-150
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    4. Hou, Yang & Holmes, Mark, 2017. "On the effects of static and autoregressive conditional higher order moments on dynamic optimal hedging," MPRA Paper 82000, University Library of Munich, Germany.
    5. repec:eee:pacfin:v:54:y:2019:i:c:p:13-28 is not listed on IDEAS
    6. Conlon, Thomas & Cotter, John, 2013. "Downside risk and the energy hedger's horizon," Energy Economics, Elsevier, vol. 36(C), pages 371-379.
    7. repec:eee:eneeco:v:63:y:2017:i:c:p:92-105 is not listed on IDEAS
    8. repec:eee:energy:v:169:y:2019:i:c:p:895-913 is not listed on IDEAS
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    10. Dai, Jun & Zhou, Haigang & Zhao, Shaoquan, 2017. "Determining the multi-scale hedge ratios of stock index futures using the lower partial moments method," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 502-510.

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