Carry Cost Rate Regimes and Futures Hedge Ratio Variation

Dean Leistikow and Ren-Raw Chen
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Dean Leistikow: Gabelli School of Business, Fordham University, New York, NY 10023, USA
Ren-Raw Chen: Gabelli School of Business, Fordham University, New York, NY 10023, USA

JRFM, 2019, vol. 12, issue 2, 1-17

Abstract: This paper tests whether the traditional futures hedge ratio (h T ) and the carry cost rate futures hedge ratio (h c ) vary in accordance with the Sercu and Wu (2000) and Leistikow et al. (2019) “h c ” theory. It does so, both within and across high and low spot asset carry cost rate (c) regimes. The high and low c regimes are specified by asset across time and across currency denominations. The findings are consistent with the theory. Within and across c regimes, h T is inefficient and h c is biased. Across c regimes, h c ’s Bias Adjustment Multiplier (BAM) does not vary significantly. Even though h c ’s bias-adjusted variant’s BAM is restricted to old data that is from a different c regime, the hedging performance of h c and its bias-adjusted variant (=h c × BAM), are superior to that for h T . Variation in c may account for the h T variation noted in the literature and variation in c should be incorporated into ex ante hedge ratios.

Keywords: carry cost rate; futures hedge ratio (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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