Futures minimum variance hedge ratio determination: An ex-ante analysis |
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| Affiliation: | 1. Gabelli School of Business, Fordham University, 45 Columbus Avenue, New York, NY 10019, United States;2. FICC, Taipei Fubon Commercial Bank, 18F 169 Section 4 Ren Ai Road, Taipei, Taiwan;1. School of Economics and Management, Key Laboratory of Financial Science and Technology Innovation, Fuzhou University, 2 Xue Yuan Road, University Town, Fuzhou, Fujian, PR China;2. School of Economics and Management, Fuzhou University, 2 Xue Yuan Road, University Town, Fuzhou, Fujian, PR China;1. Department of Finance, School of Economics and Finance, Universidad EAFIT, Carrera 49 No. 7 Sur-50, Medellin, Colombia;2. School of Management, Universidad de los Andes, Calle 21, No. 1-20, Bogota, Colombia;3. Department of Economics and IME, University of Salamanca, Campus Miguel de Unamuno, 37007 Salamanca, Spain;1. School of Securities and Futures, Southwestern University of Finance and Economics, China;2. Department of Finance, National Central University, No. 300, Jhongda Rd., Jhongli City, Taoyuan County 32001, Taiwan, ROC;3. School of Securities and Futures, Southwestern University of Finance and Economics, No. 55, Guanghuacun Street, Chengdu, Sichuan 610074, China;1. Institute of Business Research, University of Economics Ho Chi Minh City, Viet Nam;2. South Ural State University, 76, Lenin prospekt, Chelyabinsk, Russian Federation;3. Institute of Business Research and CFVG Ho Chi Minh City, University of Economics Ho Chi Minh City, Viet Nam |
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| Abstract: | Traditionally, futures Minimum Variance Hedge Ratios (MVHRs) are determined ex post. In this paper, we derive 3 increasingly realistic ex ante MVHRs, based on the carry cost and the Vasicek model. The hedging performance of the most realistic ex ante MVHR determination method is compared to, and found to be superior to, that of the traditional MVHR for the S&P 500 index, gold, and the EUR/USD exchange rate. |
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| Keywords: | MVHR Cost-of-carry Vasicek Ex-ante-hedge-ratio |
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