Alternative Methods for Estimating the Optimal Hedge Ratio

Abstract

This paper presents a comparison between different methods used to estimate the static and time-varying optimal hedge ratio, based on their hedging effectiveness, for the U.S. wheat market.The results show that the OLS method using expanding estimation windows outperformsin terms of variance reduction the methods considered for the analysis: the static OLS and error-correction model, the rolling window OLS and the bivariate GARCH error-correction model.
Keywords: Hedging, Hedging effectiveness, Optimal hedge ratio, Risk management.