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

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

10 Pages Posted: 24 Jun 2017

See all articles by Robert Ferguson

Robert Ferguson

AnswersToGo

Dean Leistikow

Fordham University - Finance Area

Date Written: January 15, 1999

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), discusses 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.

Keywords: futures, hedge ratio, error-correction, data error effects, hedge ratio estimation

JEL Classification: G10, G13

Suggested Citation

Ferguson, Robert and Leistikow, Dean, Futures Hedge Profit Measurement Error-Correction Model vs. Regression Approach Hedge Ratios, and Data Error Effects (January 15, 1999). Financial Management, Vol. 28, No. 4, Winter 1999. Available at SSRN: https://ssrn.com/abstract=2991238 or http://dx.doi.org/10.2139/ssrn.2991238

Robert Ferguson (Contact Author)

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6815 Edgewater Drve
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7868974573 (Phone)

Dean Leistikow

Fordham University - Finance Area ( email )

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

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