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A simple test of optimal hedging policy

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  • Chiu, Wan-Yi

Abstract

This paper investigates the equivalence between the optimal hedge ratio derived in a risk-return simplification and the optimal hedge ratio using mean–variance analysis. In accordance with this relationship, we develop a simple regression-based test for evaluating the hedging effectiveness of the risk-return hedging. As a result, a t-test and an F-test are designed to examine the hedge ratio and hedging effectiveness, respectively. An example of hedging is also provided to illustrate this process.

Suggested Citation

  • Chiu, Wan-Yi, 2013. "A simple test of optimal hedging policy," Statistics & Probability Letters, Elsevier, vol. 83(4), pages 1062-1070.
    • Handle: RePEc:eee:stapro:v:83:y:2013:i:4:p:1062-1070
    DOI: 10.1016/j.spl.2012.12.014
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    References listed on IDEAS

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