Minimum variance hedging: Levels versus first differences

Sören Prehn

No 312051, 95th Annual Conference, March 29-30, 2021, Warwick, UK (Hybrid) from Agricultural Economics Society - AES

Abstract: Nowadays it is widely accepted to estimate minimum variance hedge ratio regressions in first differences. There are both statistical and economic reasons for a first difference approach. However, no study has ever analyzed whether the first difference approach is also consistent with the theory of minimum variance hedging. In this paper we show, on the basis of a simulation study, that the first difference model with intercept does not provide hedge ratio estimates that are in line with the theory of minimum variance hedging. Only a linear regression model in levels provides theoretically consistent results.

Keywords: Agricultural Finance; Research Methods/ Statistical Methods (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aesc21:312051

DOI: 10.22004/ag.econ.312051

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