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A note on the superiority of the OLS hedge ratio

✍ Scribed by Donald Lien

Publisher
John Wiley and Sons
Year
2005
Tongue
English
Weight
80 KB
Volume
25
Category
Article
ISSN
0270-7314

No coin nor oath required. For personal study only.

✦ Synopsis

Suppose that spot and futures prices are generated from an errorcorrection model. This note demonstrates that, although the OLS model is misspecified, it provides a hedge ratio that usually outperforms the hedge ratio derived from the correct error-correction model. The opposite result is possible only when the postsample incurs a major structural change from the estimation sample.

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