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The Hedging Effectiveness of ECU Futures Contracts: Forecasting Evidence from an Error Correction Model
Author(s) -
Ghosh Asim
Publication year - 1995
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1995.tb00846.x
Subject(s) - futures contract , cointegration , econometrics , currency , economics , error correction model , hedge , sample (material) , financial economics , monetary economics , chromatography , biology , ecology , chemistry
In this paper, the traditional price change hedge ratio estimation method is extended by applying the theory of cointegration in case of hedging with European Currency Unit (ECU) futures contracts. Previous studies ignore the last period's equilibrium error and short‐run deviations. The findings of this study indicate that the hedge ratio estimated by the error correction method is superior to the one obtained from the traditional method, as evidenced by the likelihood ratio test and out‐of‐sample forecasts. Hedgers can control the risk of their portfolios more effectively at a lower cost.