The limits to minimum-variance hedging
Harris, Richard D. F.; Shen, Jian; Stoja, Evarist
Date: 1 June 2010
Journal
Journal of Business Finance & Accounting
Publisher
Wiley-Blackwell
Publisher DOI
Related links
Abstract
In this paper, we compare the estimated minimum-variance hedge ratios from a range of conditional hedging models with the 'realized' minimum variance hedge ratio constructed using intraday data. We show that the reduction in conditionally hedged portfolio variance falls far short of the ex post maximal reduction in variance obtained ...
In this paper, we compare the estimated minimum-variance hedge ratios from a range of conditional hedging models with the 'realized' minimum variance hedge ratio constructed using intraday data. We show that the reduction in conditionally hedged portfolio variance falls far short of the ex post maximal reduction in variance obtained using the realized minimum variance hedge ratio. While this is partly due to systematic bias, correcting for this bias does little to improve hedging effectiveness. The poor performance of conditional hedging models is therefore more likely to be attributable to the unpredictability of the integrated hedge ratio.
Finance and Accounting
Faculty of Environment, Science and Economy
Item views 0
Full item downloads 0