Futures Hedge Profit Measurement, Error-Correction Model vs. Regression Approach Hedge Ratios, and Data Error Effects

Financial Management, Vol. 28, No. 4, Winter 1999

Posted: 20 Jun 2001

See all articles by Robert Ferguson

Robert Ferguson

Axiomatic Systems, Inc.

Dean Leistikow

Fordham University - Finance Area

Abstract

This paper proposes that, and explains why, hedge profits and regression approach hedge ratios should be calculated using cost-of-carry-adjusted price changes. This Modified Regression Method for determining hedge ratios is denoted MRM. The paper discusses the Error-Correction Model for hedge ratio determination as it has been applied (denoted ECM), discuss how it should be applied, and relates each to the MRM. Data errors can cause the MRM hedge ratios to be smaller and more variable than the ECM's (as observed empirically). On theoretical and practical grounds, the MRM is preferred to the ECM unless there are significant data errors.

JEL Classification: M41, G10

Suggested Citation

Ferguson, Robert and Leistikow, Dean, Futures Hedge Profit Measurement, Error-Correction Model vs. Regression Approach Hedge Ratios, and Data Error Effects. Financial Management, Vol. 28, No. 4, Winter 1999. Available at SSRN: https://ssrn.com/abstract=267714

Robert Ferguson (Contact Author)

Axiomatic Systems, Inc. ( email )

5151 Collins Avenue, Suite 552
Miami Beach, FL 33140
United States
305-866-7720 (Phone)

Dean Leistikow

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States

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