Calculating the optimal hedge ratio: Constant, time varying and the Kalman Filter approach

Abdulnasser Hatemi-J, Eduardo Roca

Research output: Contribution to journalArticlepeer-review

19 Citations (Scopus)

Abstract

A crucial input in the hedging of risk is the optimal hedge ratio - defined by the relationship between the price of the spot instrument and that of the hedging instrument. Since it has been shown that the expected relationship between economic or financial variables may be better captured by a time varying parameter model rather than a fixed coefficient model, the optimal hedge ratio, therefore, can be one that is time varying rather than constant. This study suggests and demonstrates the use of the Kalman Filter approach for estimating time varying hedge ratio - a procedure that is statistically more efficient and with better forecasting properties.

Original languageEnglish
Pages (from-to)293-299
Number of pages7
JournalApplied Economics Letters
Volume13
Issue number5
DOIs
Publication statusPublished - Apr 15 2006
Externally publishedYes

ASJC Scopus subject areas

  • Economics and Econometrics

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