Comparing the Effectiveness of Traditional and Time Varying Hedge Ratios Using New Zealand and Australian Debt Futures Contracts

Katherine J Wilkinson, Lawrence Rose and Martin Young

The Financial Review, 1999, vol. 34, issue 3, 79-94

Abstract: We apply cointegration methodology to the New Zealand and Australian 90-day, three-year and 10-year debt and futures markets. We compare traditional methods of calculating hedge ratios with those computed by using univariate and multivariate error correction models. We use out-of-sample forecasting to determine which approach is the most effective. Contrary to recent research, our results show that univariate and multivariate error correlation models do not outperform more traditional methods of constructing hedges. Copyright 1999 by MIT Press.

Date: 1999
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