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

✍ Scribed by Donald Lien; Keshab Shrestha

Publisher
John Wiley and Sons
Year
2006
Tongue
English
Weight
175 KB
Volume
27
Category
Article
ISSN
0270-7314

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✦ Synopsis

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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