A note on the superiority of the OLS hedge ratio

Donald Lien

Journal of Futures Markets, 2005, vol. 25, issue 11, 1121-1126

Abstract: Suppose that spot and futures prices are generated from an error‐correction model. This note demonstrates that, although the OLS model is misspecified, it provides a hedge ratio that usually outperforms the hedge ratio derived from the correct error‐correction model. The opposite result is possible only when the postsample incurs a major structural change from the estimation sample. ©2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:1121–1126, 2005

Date: 2005
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