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Comparative analysis of risk measures for optimal hedge ratio determination

Author

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  • Müller, Fernanda Maria
  • Spindler, Leonardo Teixeira
  • Righi, Marcelo Brutti

Abstract

We present a comparative study of loss and loss-deviation measures for optimal hedge ratio estimation in a minimum-loss and loss-deviation framework. The study encompasses five equity market indices and their futures contracts, covering developed and emerging markets from 2006 to 2024. The results show that the Expected Loss Deviation (ELD) measure leads to an average 94.5% and 82% reduction of variance and Value at Risk (VaR), respectively, thus outperforming other traditional measures, such as Expected Shortfall (ES) and Expectile Value at Risk (EVaR). Risk and loss-deviation measures with significance-level parameters showed increased effectiveness with higher significance levels. This research contributes to the literature by systematically comparing risk measures and highlighting the practical advantages of using loss-deviation measures in optimizing hedging strategies.

Suggested Citation

  • Müller, Fernanda Maria & Spindler, Leonardo Teixeira & Righi, Marcelo Brutti, 2025. "Comparative analysis of risk measures for optimal hedge ratio determination," Finance Research Letters, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325000601
    DOI: 10.1016/j.frl.2025.106795
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