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Effectiveness of minimum-variance hedging

journal contribution
posted on 2023-06-08, 12:21 authored by Carol AlexanderCarol Alexander, Andreza Barbosa
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.

History

Publication status

  • Published

Journal

Journal of Portfolio Management

ISSN

0095-4918

Publisher

Institutional Investor Inc

Issue

2

Volume

33

Page range

46-59

Department affiliated with

  • Business and Management Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2012-09-11

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