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The Effects Of Price Dynamics On Optimal Futures Hedging



    () (Department of Finance, University of Texas at San Antonio, USA)


    () (Risk Management Institute, National University of Singapore, Singapore)


In this paper, we analytically derive the adjustments needed for the conventional hedge ratio due to the presence of short-run and long-run dynamics. We also analytically show the performance impact of these dynamics. We apply the method discussed in the paper to eight different stock index futures contracts from seven different countries. It is found that the short-run dynamics has no effect whereas the long-run dynamics may produce significant effects on the optimal hedge ratio and the hedging performance.

Suggested Citation

  • Donald Lien & Keshab Shrestha, 2012. "The Effects Of Price Dynamics On Optimal Futures Hedging," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-10.
  • Handle: RePEc:wsi:afexxx:v:07:y:2012:i:02:n:s201049521250008x
    DOI: 10.1142/S201049521250008X

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    References listed on IDEAS

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    More about this item


    Hedge ratio; hedging performance; price dynamics; short-run; long-run; G13;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing


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