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Evaluating the Effectiveness of Futures Hedging

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Handbook of Financial Econometrics and Statistics

Abstract

This chapter examines the Ederington hedging effectiveness (EHE) comparisons between unconditional OLS hedge strategy and other conditional hedge strategies. It is shown that OLS hedge strategy outperforms most of the optimal conditional hedge strategies when EHE is used as the hedging effectiveness criteria. Before concluding that OLS hedge is better than the others, however, we need to understand under what circumstances the result is derived. We explain why OLS is the best hedge strategy under EHE criteria in most cases and how most conditional hedge strategies are judged as inferior to OLS hedge strategy by an EHE comparison.

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Author information

Authors and Affiliations

  1. University of Texas at San Antonio, San Antonio, TX, USA

    Donald Lien

  2. University of New South Wales, Sydney, Australia

    Geul Lee & Li Yang

  3. Shanghai Jiaotong University, Shanghai, China

    Chunyang Zhou

Authors
  1. Donald Lien
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  2. Geul Lee
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  3. Li Yang
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  4. Chunyang Zhou
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Corresponding author

Correspondence to Donald Lien .

Editor information

Editors and Affiliations

  1. Department of Finance and Economics, Rutgers Business School, Rutgers, The State University of New Jersey, Piscataway, New Jersey, USA

    Cheng-Few Lee

  2. Center for PBBEF Research, North Brunswick, New Jersey, USA

    John C. Lee

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Lien, D., Lee, G., Yang, L., Zhou, C. (2015). Evaluating the Effectiveness of Futures Hedging. In: Lee, CF., Lee, J. (eds) Handbook of Financial Econometrics and Statistics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7750-1_70

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  • DOI: https://doi.org/10.1007/978-1-4614-7750-1_70

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  • Publisher Name: Springer, New York, NY

  • Print ISBN: 978-1-4614-7749-5

  • Online ISBN: 978-1-4614-7750-1

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