Stochastic optimal hedge ratio: Theory and evidence

Abdulnasser Hatemi-J and Youssef El-Khatib

MPRA Paper from University Library of Munich, Germany

Abstract: The minimum variance hedge ratio is widely used by investors to immunize against the price risk. This hedge ratio is usually assumed to be constant across time by practitioners, which might be too restrictive assumption because the optimal hedge ratio might vary across time. In this paper we put forward a proposition that a stochastic hedge ratio performs differently than a hedge ratio with constant structure even in the situations in which the mean value of the stochastic hedge ratio is equal to the constant hedge ratio. A mathematical proof is provided for this proposition combined with some simulation results and an application to the US stock market during 1999-2009 using weekly data.

Keywords: Optimal Hedge Ratio; Stochastic Hedge Ratio; the US (search for similar items in EconPapers)
JEL-codes: C32 G10 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/26153/1/MPRA_paper_26153.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/45173/1/MPRA_paper_26153.pdf revised version (application/pdf)

Related works:
Journal Article: Stochastic optimal hedge ratio: theory and evidence (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:26153

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