The Limits to Minimum Variance Hedging

Research output: Contribution to journalArticle (Academic Journal)peer-review

13 Citations (Scopus)

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 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.
Translated title of the contributionThe Limits to Minimum Variance Hedging
Original languageEnglish
Pages (from-to)737 - 761
Number of pages25
JournalJournal of Business Finance and Accounting
Volume37
Issue number5-6
DOIs
Publication statusPublished - Jun 2010

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