The Empirical Minimum-Variance Hedge

Sergio Lence and Dermot Hayes

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Decision making under unknown true parameters (estimation risk) is discussed along with Bayes and parameter certainty equivalent (PCE) criteria. Bayes criterion provides the solution for optimal decision making under estimation risk in a manner consistent with expected utility maximization. The PCE method is not consistent with expected utility maximization, but is the approach commonly used.Bayes criterion is applied to solve for the minimum variance hedge ratio (MVH) in two scenarios based on the multivariate normal distribution. Simulations show that discrepancies between prior and sample parameters may lead to substantial differences between Bayesian and PCE MVHs. Such discrepancies also highlight the superiority of Bayes criterion over the PCE, in the sense that the PCE method cannot not yield decision rules that contain prior (or nonsample) along with sample information.

Date: 1994-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
https://dr.lib.iastate.edu/server/api/core/bitstre ... 029cf51cd5c1/content
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
Journal Article: The Empirical Minimum-Variance Hedge (1994)
Working Paper: Empirical Minimum-Variance Hedge (The) (1994)
Working Paper: Empirical Minimum Variance Hedge, The (1993)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:isu:genstf:199401010800001138

Access Statistics for this paper

More papers in ISU General Staff Papers from Iowa State University, Department of Economics Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070. Contact information at EDIRC.
Bibliographic data for series maintained by Curtis Balmer ().