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

Donald Lien, Keshab Shrestha

Research output: Contribution to journalArticleResearchpeer-review

50 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)127-150
Number of pages24
JournalJournal of Futures Markets
Volume27
Issue number2
DOIs
Publication statusPublished - Feb 2007
Externally publishedYes

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