Three Alternative Methods for Estimating Hedge Ratios
Journal
Encyclopedia of Finance, Third Edition
Pages
1703–1726
ISBN
9783030912314
Date Issued
2022
Author(s)
Abstract
This chapter first discusses four different theoretical models, which include minimum variance, mean-variance, expected utility, and value-at-risk method. Then we use S&P 500 data to show how three alternative estimation methods can be used to estimate hedge ratio. These three methods include OLS method, GARCH method, and cointegration and error correction method. We found that OLS method is not sufficient for estimating hedge ratio.
Subjects
ARCH GARCH model | Cointegration | Hedge ratio | Mean-variance hedge ratio | Minimum variance
Publisher
Springer International Publishing
Type
book part