Effectiveness of minimum-variance hedging

Alexander, Carol and Barbosa, Andreza (2007) Effectiveness of minimum-variance hedging. Journal of Portfolio Management, 33 (2). pp. 46-59. ISSN 0095-4918

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Abstract

Advanced 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.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance
Depositing User: Carol Alexander
Date Deposited: 11 Sep 2012 14:05
Last Modified: 11 Sep 2012 14:05
URI: http://sro.sussex.ac.uk/id/eprint/40598
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