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Tests of the Difference between In-Sample and Post-Sample Hedging Effectiveness

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  • Dahlgran, Roger A.

Abstract

Hedging effectiveness is proportional price-risk reduction achieved by hedging. Typically, hedging studies estimate hedging effectiveness for the sample period then use estimated hedge ratios to simulate hedging and estimate hedging effectiveness in a “post-sample” period. This paper derives the statistical properties of the sample-period effectiveness estimator and the statistical properties of the difference between the sample-period and the post-sample period estimators. We find that the bias associated with the sample-period estimator is negligible and that a difference between the sample estimator and the post-sample estimator ties directly to changes in the structural parameters of the hedge-ratio regression. We develop tests for structural change and demonstrate those tests with an empirical example.

Suggested Citation

  • Dahlgran, Roger A., 2015. "Tests of the Difference between In-Sample and Post-Sample Hedging Effectiveness," 2015 Conference, April 20-21, 2015, St. Louis, Missouri 285829, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:n13415:285829
    DOI: 10.22004/ag.econ.285829
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    References listed on IDEAS

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    1. Anderson, Ronald W & Danthine, Jean-Pierre, 1980. "Hedging and Joint Production: Theory and Illustrations," Journal of Finance, American Finance Association, vol. 35(2), pages 487-498, May.
    2. Roger A. Dahlgran, 2000. "Cross-hedging the cottonseed crush: A case study," Agribusiness, John Wiley & Sons, Ltd., vol. 16(2), pages 141-158.
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    10. David Kenyon & John Clay, 1987. "Analysis of profit margin hedging strategies for hog producers," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 7(2), pages 183-202, April.
    11. Dahlgran, Roger A., 2005. "Transaction Frequency and Hedging in Commodity Processing," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(3), pages 1-20, December.
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