Estimation of the Optimal Futures Hedge

Stephen Cecchetti, Robert Cumby () and Stephen Figlewski

The Review of Economics and Statistics, 1988, vol. 70, issue 4, 623-30

Abstract: Standard approaches to designing a futures hedge often suffer from two major problems. First, they focus only on minimizing risk, so no account is taken of the impact on expected return. Second , in estima ting the hedge ratio, no allowance is made for time variation in the distribution of cash and futures price changes. This paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging Treasury bonds with T-bond futures. Copyright 1988 by MIT Press.

Date: 1988
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