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Effectiveness of minimum-variance hedging
journal contribution
posted on 2023-06-08, 12:21 authored by Carol AlexanderCarol Alexander, Andreza BarbosaAdvanced electronic trading platforms and index exchange-traded funds (ETFs) have an impact on the minimum-variance hedging of stock indexes with futures. Minimum-variance hedging may provide better out-of-sample hedging performance than a naive futures hedge, but only in markets without active trading of ETFs or advanced electronic communications networks. There is no evidence now to suggest that complex econometric models that include, e.g., time-varying conditional covariances and error correction can improve on the simple ordinary least squares hedge ratio. In markets with actively traded index ETFs and well-established electronic trading, no significant efficiency gains are apparent from any minimum-variance hedge.
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Publication status
- Published
Journal
Journal of Portfolio ManagementISSN
0095-4918Publisher
Institutional Investor IncExternal DOI
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2Volume
33Page range
46-59Department affiliated with
- Business and Management Publications
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- No
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- Yes
Legacy Posted Date
2012-09-11Usage metrics
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