Hedging with Futures: Does Anything Beat the Naïve Hedging Strategy?

Yudong Wang, Chongfeng Wu () and Li Yang ()
Additional contact information
Chongfeng Wu: Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai 200052, China
Li Yang: School of Banking and Finance, University of New South Wales, Sydney, New South Wales 2052, Australia

Management Science, 2015, vol. 61, issue 12, 2870-2889

Abstract: This paper investigates out-of-sample performance of the naïve hedging strategy relative to that of the minimum variance hedging strategy, in which the covariance parameters are estimated from 18 econometric models. Hedging performance is compared across 24 futures markets. Our main findings suggest that it is difficult to find a strategy under the minimum variance framework that outperforms the naïve hedging strategy both consistently and significantly. Our findings are robust to different sample periods, estimation windows, and hedging horizons and can be partly explained by the effects of estimation error and model misspecification.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2028 . This paper was accepted by Itay Goldstein, finance.

Keywords: hedging with futures; naïve strategy; minimum variance hedge ratios; estimation error; model misspecification (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2014.2028 (application/pdf)

Related works:
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:inm:ormnsc:v:61:y:2015:i:12:p:2870-2889

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().