TY - JOUR

T1 - Calculating the optimal hedge ratio

T2 - Constant, time varying and the Kalman Filter approach

AU - Hatemi-J, Abdulnasser

AU - Roca, Eduardo

PY - 2006/4/15

Y1 - 2006/4/15

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=33646360237&partnerID=8YFLogxK

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U2 - 10.1080/13504850500365848

DO - 10.1080/13504850500365848

M3 - Article

AN - SCOPUS:33646360237

VL - 13

SP - 293

EP - 299

JO - Applied Economics Letters

JF - Applied Economics Letters

SN - 1350-4851

IS - 5

ER -