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A Reformulation of the Portfolio Model of Hedging
Author(s) -
Brown Stewart L.
Publication year - 1985
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1241069
Subject(s) - hedge , portfolio , market neutral , economics , replicating portfolio , econometrics , post modern portfolio theory , portfolio optimization , basis risk , set (abstract data type) , actuarial science , financial economics , capital asset pricing model , computer science , ecology , biology , programming language
The portfolio approach to hedging assumes that the primary motivation for hedging is risk reduction. The paper reexamines the portfolio approach to hedging and respecifies the model in such a way that hedge ratios are estimated using returns rather than price levels. Using the same data set, hedge ratios estimated using price levels differ from one while hedge ratios using returns are found to be insignificantly different from one. The results do not support the portfolio approach to hedging. Therefore, one must look elsewhere for empirical support for the risk‐reduction theory of hedging.