Statistical properties of post-sample hedging effectiveness

Lien, Donald

doi:10.1016/j.irfa.2007.01.002

Cited by 9 publications

(4 citation statements)

References 10 publications

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“…Such findings are in line with Bystrom (2003), Copeland and Zhu (2006), Lien et al (2002) and Moosa (2003), where OLS was found to outperform the more complex and sophisticated models. Later, in Lien (2007), it is shown that, in large sample cases, the conventional hedge ratio provides the best performance, whereas for small sample cases a sufficiently large variation in the dynamic variance of the futures return is required in order for dynamic models to produce favourable variance reduction. It is also worth noting that the hedging effectiveness measure is based upon the unconditional variance.…”

Section: Rankmentioning

confidence: 99%

Estimation and performance evaluation of optimal hedge ratios in the carbon market of the European Union Emissions Trading Scheme

Fan

Roca

Akimov

2013

Australian Journal of Management

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Following the introduction of the European Union Emissions Trading Scheme (EU-ETS), CO 2 emissions have become a tradable commodity. As a regulated party, emitters are forced to take into account the additional cost of carbon emissions in their production costs structure. Given the high volatility in the carbon price, the importance of price risk management becomes unquestionable. This study is the first attempt that has been made to calculate hedge ratios and to investigate their hedging effectiveness in the EU-ETS carbon market by applying conventional, recently developed estimation models. These hedge ratios are then compared with those derived for other markets. In spite of the uniqueness and novelty of the carbon market, the results of the study are consistent with those found in other markets -that the hedge ratio is in the range of 0.5-1.0 and is still best estimated by simple regression models.

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Section: Rankmentioning

confidence: 99%

Estimation and performance evaluation of optimal hedge ratios in the carbon market of the European Union Emissions Trading Scheme

Fan

Roca

Akimov

2013

Australian Journal of Management

View full text Add to dashboard Cite

show abstract

“…Such findings are in line with Bystrom (2003), Copeland and Zhu (2006), Lien et al (2002) and Moosa (2003), where OLS was found to outperform the more complex and sophisticated models. Later in Lien (2007), it is shown that, in large sample cases, the conventional hedge ratio provides the best performance, whereas for small sample cases a sufficiently large variation in the dynamic variance of the futures return is required in order for dynamic models to produce favourable variance reduction. It is also worth noting that the hedging effectiveness measure is based upon the unconditional variance.…”

Section: Variance Reductionmentioning

confidence: 99%

Estimation and Performance Evaluation of Optimal Hedge Ratios in the Carbon Market of the European Union Emissions Trading Scheme

2010

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Following the introduction of the European Union Emissions Trading Scheme, CO2 emissions have become a tradable commodity. As a regulated party, emitters are forced to take into account the additional carbon emissions costs in their production costs structure. Given the high volatility of carbon price, the importance of price risk management becomes unquestioned. This study is the first attempt to calculate hedge ratios and to investigate their hedging effectiveness in the EU-ETS carbon market by applying conventional and recently developed models of estimation. These hedge ratios are then compared with those derived for other markets. In spite of the uniqueness and novelty of the carbon market, the results of the study are consistent with those found in other markets -that the hedge ratio is in the range of 0.5 to 1.0 and still best estimated by simple regression models.

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“…To evaluate the effectiveness of this function, the hedging performance measure of Ederington (1979) is often applied. 1 This method computes the percentage reduction of 1 Within the family of stationary hedge strategy (where a constant hedge ratio is adopted over time), the OLS strategy has the best within-sample performance and most likely the best out-of-sample performance (Lien, 2005a(Lien, , 2005b(Lien, , 2007. In addition, Lien (2008aLien ( , 2009) suggests that dynamic hedge strategy tends to be outperformed by the OLS strategy as well.…”

Section: Introductionmentioning

confidence: 99%