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A note on a risk‐return measure of hedging effectiveness
Author(s) -
Satyanarayan Sudhakar
Publication year - 1998
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/(sici)1096-9934(199810)18:7<867::aid-fut6>3.0.co;2-9
Subject(s) - chen , futures contract , a priori and a posteriori , measure (data warehouse) , order (exchange) , hedge , econometrics , mathematical economics , economics , actuarial science , computer science , financial economics , philosophy , data mining , finance , epistemology , paleontology , ecology , biology
In a recent paper, Kuo and Chen (1995) propose a simplification of the Howard and D'Antonio (1984, 1987) model of hedging effectiveness. This note extends Kuo‐Chen's suggested simplification to derive the optimal hedge ratio and second order conditions (SOCs) of the Howard‐D'Antonio model. These SOCs were previously reported incorrectly by both Howard and D'Antonio (1984, 1987) and Chang and Shanker (1987). The corrected SOC is less restrictive than supposed previously and shows that there is no need to make a priori assumptions about risk‐return relatives between spot and futures assets to ensure that SOCs conditions are satisfied. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:867–870, 1998