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An empirical analysis of the relationship between the hedge ratio and hedging horizon: A simultaneous estimation of the short‐ and long‐run hedge ratios
Author(s) -
Chen ShengSyan,
Lee ChengFew,
Shrestha Keshab
Publication year - 2004
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/fut.10121
Subject(s) - hedge , horizon , econometrics , economics , estimation , time horizon , mathematics , finance , geometry , management , biology , ecology
This article analyzes the effects of the length of hedging horizon on the optimal hedge ratio and hedgingeffectiveness using 9 different hedging horizons and 25 different commodities. We discuss the concept ofshort‐ and long‐run hedge ratios and propose a technique to simultaneously estimate them. Theempirical results indicate that the short‐run hedge ratios are significantly less than 1 and increase withthe length of hedging horizon. We also find that hedging effectiveness increases with the length of hedginghorizon. However, the long‐run hedge ratio is found to be close to the naïve hedge ratio of unity. Thisimplies that, if the hedging horizon is long, then the naïve hedge ratio is close to the optimum hedge ratio.© 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:359–386, 2004