COMPARING THE PERFORMANCES OF THE PARTIAL EQUILIBRIUM AND TIME-SERIES APPROACHES TO HEDGING

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using a simple derivative with a linear payoff function (a futures contract). For various methods of parameter estimation and inference, we find that the partial equilibrium models cannot out-perform the time series model. The partial equilibrium models unpalatable assumptions of deterministically evolving futures volatility seems to impede their hedging effectiveness, even when potentially foresighted option-implied volatility term structures are employed.


Subject(s):
Issue Date:
2003
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/18972
Total Pages:
33
Series Statement:
2003 Conference, St. Louis, Missouri, April 21-22




 Record created 2017-04-01, last modified 2017-04-26

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