The Economic Value of Minimum-Variance Hedges

Sergio Lence

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: The present article examines the potential economic gains from "better" minimum-variance hedge (MVH) estimates, focusing on the assumptions that yield MVHs consistent with expected-utility maximization. It is found that the economic value of "better" MVH estimates is negligible, and that optimal hedges are substantially different from MVHs when the usual MVH restrictions are relaxed. Among other things, findings suggest that the hedging research's recent emphasis on "better" MVHs has been a waste of resources. Investigating the consequences of relaxing the standard MVH assumptions seems to be much more important than recent literature contributions.

Date: 1995-05-01
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Published in American Journal of Agricultural Economics, May 1995, vol. 77 no. 2, pp. 353-364

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