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An empirical analysis of the relationship between the hedge ratio and hedging horizon: A simultaneous estimation of the short- and long-run hedge ratios

✍ Scribed by Sheng-Syan Chen; Cheng-Few Lee; Keshab Shrestha

Publisher: John Wiley and Sons
Year: 2004
Tongue: English
Weight: 184 KB
Volume: 24
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.10121

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✦ Synopsis

Abstract

This article analyzes the effects of the length of hedging horizon on the optimal hedge ratio and hedging
effectiveness using 9 different hedging horizons and 25 different commodities. We discuss the concept of
short‐ and long‐run hedge ratios and propose a technique to simultaneously estimate them. The
empirical results indicate that the short‐run hedge ratios are significantly less than 1 and increase with
the length of hedging horizon. We also find that hedging effectiveness increases with the length of hedging
horizon. However, the long‐run hedge ratio is found to be close to the naïve hedge ratio of unity. This
implies that, if the hedging horizon is long, then the naïve hedge ratio is close to the optimum hedge ratio.
© 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:359–386, 2004

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