Futures hedge rations: a review

Sheng Syan Chen, Cheng Few Lee, Keshab Shrestha

Research output: Contribution to journalArticleResearchpeer-review

108 Citations (Scopus)

Abstract

This paper presents a review of different theoretical approaches to the optimal futures hedge ratios. These approaches are based on minimum variance, mean-variance, expected utility, mean extended-Gini coefficient, as well as semivariance. Various ways of estimating these hedge ratios are also discussed, ranging from simple ordinary least squares to complicated heteroscedastic cointegration methods. Under martingale and joint-normality conditions, different hedge ratios are the same as the minimum variance hedge ratio. Otherwise, the optimal hedge ratios based on the different approaches are different and there is no single optimal hedge ratio that is distinctly superior to the remaining ones.

Original languageEnglish
Pages (from-to)433-465
Number of pages33
JournalQuarterly Review of Economics and Finance
Volume43
Issue number3
DOIs
Publication statusPublished - 2003
Externally publishedYes

Keywords

  • Cointegration
  • Gini coefficient
  • Hedge ratio
  • Minimum variance
  • Semivariance

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