THE EFFECTS OF PRICE DYNAMICS ON OPTIMAL FUTURES HEDGING

Donald Lien () and Keshab Shrestha
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Donald Lien: Department of Finance, University of Texas at San Antonio, USA

Annals of Financial Economics (AFE), 2012, vol. 07, issue 02, 1-10

Abstract: In this paper, we analytically derive the adjustments needed for the conventional hedge ratio due to the presence of short-run and long-run dynamics. We also analytically show the performance impact of these dynamics. We apply the method discussed in the paper to eight different stock index futures contracts from seven different countries. It is found that the short-run dynamics has no effect whereas the long-run dynamics may produce significant effects on the optimal hedge ratio and the hedging performance.

Keywords: Hedge ratio; hedging performance; price dynamics; short-run; long-run; G13 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1142/S201049521250008X

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