Premium
Quantile Estimation of Optimal Hedge Ratio
Author(s) -
Lien Donald,
Shrestha Keshab,
Wu Jing
Publication year - 2016
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.21712
Subject(s) - quantile , econometrics , hedge , realization (probability) , economics , mathematics , statistics , distribution (mathematics) , estimation , ecology , mathematical analysis , management , biology
In this study, we analyze the dependence of hedging effectiveness on the realization of spot return by introducing the concept of a quantile hedge ratio. We estimate quantile hedge ratios for 20 different commodities at 15 quantiles. For daily data, we find that the quantile hedge ratio varies with the spot return distribution, displaying an inverted‐U relationship such that the quantile hedge ratios are generally smaller at the upper and lower tails of the spot distribution. The severity of these characteristics differs across commodities. However, for weekly and four‐weekly data, these characteristics are less prominent. Thus, the conventional hedge ratio would be appropriate for longer horizons, but not for shorter horizons. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:194–214, 2016