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A note on the superiority of the OLS hedge ratio
Author(s) -
Lien Donald
Publication year - 2005
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.20172
Subject(s) - futures contract , econometrics , error correction model , hedge , economics , sample (material) , mathematics , statistics , financial economics , cointegration , physics , thermodynamics , ecology , biology
Suppose that spot and futures prices are generated from an error‐correction model. This note demonstrates that, although the OLS model is misspecified, it provides a hedge ratio that usually outperforms the hedge ratio derived from the correct error‐correction model. The opposite result is possible only when the postsample incurs a major structural change from the estimation sample. ©2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:1121–1126, 2005
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