A Reformulation of the Portfolio Model of Hedging

Stewart L. Brown

American Journal of Agricultural Economics, 1985, vol. 67, issue 3, 508-512

Abstract: The portfolio approach to hedging assumes that the primary motivation for hedging is risk reduction. The paper reexamines the portfolio approach to hedging and respecifies the model in such a way that hedge ratios are estimated using returns rather than price levels. Using the same data set, hedge ratios estimated using price levels differ from one while hedge ratios using returns are found to be insignificantly different from one. The results do not support the portfolio approach to hedging. Therefore, one must look elsewhere for empirical support for the risk-reduction theory of hedging.

Date: 1985
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ajagec:v:67:y:1985:i:3:p:508-512.

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