Hedging with Futures: Does Anything Beat the Naïve Hedging Strategy?

41 Pages Posted: 10 Feb 2015 Last revised: 22 Feb 2015

See all articles by Yudong Wang

Yudong Wang

Shanghai Jiao Tong University (SJTU)

Chongfeng Wu

Shanghai Jiao Tong University (SJTU) - Aetna School of Management

Li Yang

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Date Written: July 5, 2014

Abstract

This article investigates out-of-sample performance of the naïve hedging strategy relative to that of the minimum variance hedging strategy, in which the covariance parameters are estimated from eighteen econometric models. Hedging performance is compared across twenty-four futures markets. Our main findings suggest that it is difficult to find a strategy under the minimum variance framework that outperforms the naïve hedging strategy both consistently and significantly. Our findings are robust to different sample periods, estimation windows and hedging horizons, and can be partly explained by the effects of estimation error and model misspecification.

Keywords: Futures hedging; naïve strategy; minimum variance hedge ratios; estimation error; mode misspecification

Suggested Citation

Wang, Yudong and Wu, Chongfeng and Yang, Li, Hedging with Futures: Does Anything Beat the Naïve Hedging Strategy? (July 5, 2014). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2462728

Yudong Wang

Shanghai Jiao Tong University (SJTU)

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Chongfeng Wu

Shanghai Jiao Tong University (SJTU) - Aetna School of Management ( email )

No.535 Fahuazhen Road
Shanghai, 200052
China

Li Yang (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+610293855857 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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