HatemiJ, Abdulnasser and ElKhatib, Youssef (2010): Stochastic optimal hedge ratio: Theory and evidence.
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Abstract
The minimum variance hedge ratio is widely used by investors to immunize against the price risk. This hedge ratio is usually assumed to be constant across time by practitioners, which might be too restrictive assumption because the optimal hedge ratio might vary across time. In this paper we put forward a proposition that a stochastic hedge ratio performs differently than a hedge ratio with constant structure even in the situations in which the mean value of the stochastic hedge ratio is equal to the constant hedge ratio. A mathematical proof is provided for this proposition combined with some simulation results and an application to the US stock market during 19992009 using weekly data.
Item Type:  MPRA Paper 

Original Title:  Stochastic optimal hedge ratio: Theory and evidence 
English Title:  Stochastic optimal hedge ratio: Theory and evidence 
Language:  English 
Keywords:  Optimal Hedge Ratio; Stochastic Hedge Ratio; the US 
Subjects:  C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models ; Multiple Variables > C32  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models G  Financial Economics > G1  General Financial Markets > G10  General 
Item ID:  26153 
Depositing User:  Abdulnasser HatemiJ 
Date Deposited:  26. Oct 2010 01:09 
Last Modified:  31. Dec 2015 19:28 
References:  Baillie, R. T. and Myers, R. J. (1991) Bivariate GARCH estimation of the optimal commodity futures hedge, Journal of Applied Econometrics, 6, 109–24. Cecchetti, S. G., Cumby, R. E. and Figlewski, S. (2001) Estimation of the optimal futures hedge, Review of Economics and Statistics, 70, 623–30. Harvey A. (1993) Time Series Models, Second Edition, the London School of Economics, Harvester Wheatsheaf. Hull J. C. (2002) Fundamentals of futures and options markets, Fourth Edition, Prentice Hall. Kroner, K. F. and Sultan, J. (1993) Time varying distributions and dynamic hedging with foreign currency futures, Journal of Financial and Quantitative Analysis, 28, 535–51. Lien, D. and Luo, X. (1993) Estimating multiperiod hedge ratios in cointegrated markets, Journal of Futures Markets, 13, 909–20. Myers, R. J. and Thompson, S. R. (1989) Generalised optimal hedge ratio estimation, American Journal of Agricultural Economics, 71, 858–68. Park, T. H. and Switzer, L. N. (1995) Bivariate GARCH estimation of the optimal hedge ratios for stock index futures: a note, Journal of Futures Markets, 15, 61–7. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/26153 
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