To make high-quality research more accessible and easier to explore.

Fields:

Estimation of the Optimal Futures Hedge

The Review of Economics and Statistics 1988 70(4), 623
Standard approaches to designing a futures hedge often suffer from two major problems. First, they focus only on minimizing risk, so no account is taken of the impact on expected return. Second , in estima ting the hedge ratio, no allowance is made for time variation in the distribution of cash and futures price changes. This paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging Treasury bonds with T-bond futures.