Spot Asset Carry Cost Rates and Futures Hedge Ratios

24 Pages Posted: 17 May 2019

See all articles by Dean Leistikow

Dean Leistikow

Fordham University - Finance Area

Ren-Raw Chen

Fordham University - Gabelli School of Business

Yuewu Xu

Fordham University - Gabelli School of Business

Date Written: February 16, 2019

Abstract

The traditional futures hedge ratio (hT) is calculated ex post via economically structureless statistical analysis. Its lack of an economic foundation makes it inefficient and elevates its risk of error due to a regime shift. This paper proposes an ex ante, more efficient, carry cost rate (c) based hedge ratio (hc). While the paper shows that hc is biased, it demonstrates that c underlies both hT and hc, such that hT/hc is stationary. Consequently, a prior period’s hT/hc ratio, even if from the distant past, or a different c regime, works well as an ex ante bias adjustment multiplier for the current hc to mitigate its bias. Finally, it shows that the hedge effectiveness for both hc and the bias-adjusted version of hc exceed that for hT, though the excess hedge effectiveness of hc over hT is not always statistically significant.

Keywords: carry cost rate, hedge ratio

Suggested Citation

Leistikow, Dean and Chen, Ren-Raw and Xu, Yuewu, Spot Asset Carry Cost Rates and Futures Hedge Ratios (February 16, 2019). Available at SSRN: https://ssrn.com/abstract=3373739 or http://dx.doi.org/10.2139/ssrn.3373739

Dean Leistikow (Contact Author)

Fordham University - Finance Area ( email )

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

Ren-Raw Chen

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

Yuewu Xu

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10458
United States

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