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

Donald D. Lien · Keshab Shrestha

84 citations0/0 files storedJournal of Futures Markets

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Abstract

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

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References

1979The Hedging Performance of the New Futures Markets 1993Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures 2002An Introduction to Wavelets and Other Filtering Methods in Finance and Economics 1991Bivariate garch estimation of the optimal commodity futures Hedge 1988Estimation of the Optimal Futures Hedge 2002Some Recent Developments in Futures Hedging 1993Hedging with stock index futures: Estimation and forecasting with error correction model 1982THE HEDGING EFFECTIVENESS OF FOREIGN CURRENCY FUTURES

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