IDEAS home Printed from https://ideas.repec.org/a/gam/jjrfmx/v12y2019i2p78-d227989.html
   My bibliography  Save this article

Carry Cost Rate Regimes and Futures Hedge Ratio Variation

Author

Listed:
  • Dean Leistikow

    (Gabelli School of Business, Fordham University, New York, NY 10023, USA)

  • Ren-Raw Chen

    (Gabelli School of Business, Fordham University, New York, NY 10023, USA)

Abstract

This paper tests whether the traditional futures hedge ratio (h T ) and the carry cost rate futures hedge ratio (h c ) vary in accordance with the Sercu and Wu (2000) and Leistikow et al. (2019) “h c ” theory. It does so, both within and across high and low spot asset carry cost rate (c) regimes. The high and low c regimes are specified by asset across time and across currency denominations. The findings are consistent with the theory. Within and across c regimes, h T is inefficient and h c is biased. Across c regimes, h c ’s Bias Adjustment Multiplier (BAM) does not vary significantly. Even though h c ’s bias-adjusted variant’s BAM is restricted to old data that is from a different c regime, the hedging performance of h c and its bias-adjusted variant (=h c × BAM), are superior to that for h T . Variation in c may account for the h T variation noted in the literature and variation in c should be incorporated into ex ante hedge ratios.

Suggested Citation

  • Dean Leistikow & Ren-Raw Chen, 2019. "Carry Cost Rate Regimes and Futures Hedge Ratio Variation," JRFM, MDPI, vol. 12(2), pages 1-17, May.
    • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:2:p:78-:d:227989
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1911-8074/12/2/78/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1911-8074/12/2/78/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    2. Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2011. "The Effects of Derivatives on Firm Risk and Value," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 967-999, August.
    3. Anton Sorin Gabriel, 2016. "Risk Management With Financial Derivatives: Empirical Evidence From Romanian Non-Financial Firms," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 336-342, December.
    4. Lien, Donald, 2009. "A note on the hedging effectiveness of GARCH models," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 110-112, January.
    5. Lien, Donald & Shrestha, Keshab, 2008. "Hedging effectiveness comparisons: A note," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 391-396.
    6. Richard D. F. Harris & Jian Shen & Evarist Stoja, 2010. "The Limits to Minimum‐Variance Hedging," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5‐6), pages 737-761, June.
    7. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(4), pages 535-551, December.
    8. Cheng-Few Lee & Kehluh Wang & Yan Long Chen, 2009. "Hedging and Optimal Hedge Ratios for International Index Futures Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 593-610.
    9. David Shaffer & Andrea DeMaskey, 2005. "Currency Hedging Using the Mean-Gini Framework," Review of Quantitative Finance and Accounting, Springer, vol. 25(2), pages 125-137, September.
    10. Alizadeh, Amir H. & Nomikos, Nikos K. & Pouliasis, Panos K., 2008. "A Markov regime switching approach for hedging energy commodities," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1970-1983, September.
    11. Sercu, Piet & Wu, Xueping, 2000. "Cross- and delta-hedges: Regression- versus price-based hedge ratios," Journal of Banking & Finance, Elsevier, vol. 24(5), pages 735-757, May.
    12. Lucio Sarno & Giorgio Valente, 2000. "The cost of carry model and regime shifts in stock index futures markets: An empirical investigation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(7), pages 603-624, August.
    13. Kevin Aretz & Söhnke M. Bartram & Gunter Dufey, 2007. "Why hedge? Rationales for corporate hedging and value implications," Journal of Risk Finance, Emerald Group Publishing, vol. 8(5), pages 434-449, November.
    14. Robert Ferguson & Dean Leistikow, 1999. "Futures Hedge Profit Measurement, Error-Correction Model vs Regression Approach Hedge Ratios and Data Error Effects," Financial Management, Financial Management Association, vol. 28(4), Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dean Leistikow & Ren-Raw Chen & Yuewu Xu, 2022. "Spot asset carry cost rates and futures hedge ratios," Review of Quantitative Finance and Accounting, Springer, vol. 58(4), pages 1741-1779, May.
    2. Stavros Degiannakis & Christos Floros & Enrique Salvador & Dimitrios Vougas, 2022. "On the stationarity of futures hedge ratios," Operational Research, Springer, vol. 22(3), pages 2281-2303, July.
    3. Thanasis Stengos, 2020. "Recent Advancements in Section “Economics and Finance”," JRFM, MDPI, vol. 13(11), pages 1-2, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dean Leistikow & Ren-Raw Chen & Yuewu Xu, 2022. "Spot asset carry cost rates and futures hedge ratios," Review of Quantitative Finance and Accounting, Springer, vol. 58(4), pages 1741-1779, May.
    2. Park, Jin Suk & Shi, Yukun, 2017. "Hedging and speculative pressures and the transition of the spot-futures relationship in energy and metal markets," International Review of Financial Analysis, Elsevier, vol. 54(C), pages 176-191.
    3. Chen, Ren-Raw & Leistikow, Dean & Wang, Andrew, 2020. "Futures minimum variance hedge ratio determination: An ex-ante analysis," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    4. Aragó, Vicent & Salvador, Enrique, 2011. "Sudden changes in variance and time varying hedge ratios," European Journal of Operational Research, Elsevier, vol. 215(2), pages 393-403, December.
    5. Ubukata, Masato, 2018. "Dynamic hedging performance and downside risk: Evidence from Nikkei index futures," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 270-281.
    6. Zhipeng, Yan & Shenghong, Li, 2018. "Hedge ratio on Markov regime-switching diagonal Bekk–Garch model," Finance Research Letters, Elsevier, vol. 24(C), pages 49-55.
    7. Su, EnDer, 2013. "Stock index hedge using trend and volatility regime switch model considering hedging cost," MPRA Paper 49190, University Library of Munich, Germany.
    8. Stavros Degiannakis & Christos Floros & Enrique Salvador & Dimitrios Vougas, 2022. "On the stationarity of futures hedge ratios," Operational Research, Springer, vol. 22(3), pages 2281-2303, July.
    9. Billio, Monica & Casarin, Roberto & Osuntuyi, Anthony, 2018. "Markov switching GARCH models for Bayesian hedging on energy futures markets," Energy Economics, Elsevier, vol. 70(C), pages 545-562.
    10. Olson, Eric & Vivian, Andrew & Wohar, Mark E., 2019. "What is a better cross-hedge for energy: Equities or other commodities?," Global Finance Journal, Elsevier, vol. 42(C).
    11. Bessler, Wolfgang & Leonhardt, Alexander & Wolff, Dominik, 2016. "Analyzing hedging strategies for fixed income portfolios: A Bayesian approach for model selection," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 239-256.
    12. Alexander, Carol & Prokopczuk, Marcel & Sumawong, Anannit, 2013. "The (de)merits of minimum-variance hedging: Application to the crack spread," Energy Economics, Elsevier, vol. 36(C), pages 698-707.
    13. Kunlapath Sukcharoen & Hankyeung Choi & David J. Leatham, 2015. "Optimal gasoline hedging strategies using futures contracts and exchange-traded funds," Applied Economics, Taylor & Francis Journals, vol. 47(32), pages 3482-3498, July.
    14. Hammoudeh, Shawkat M. & Yuan, Yuan & McAleer, Michael & Thompson, Mark A., 2010. "Precious metals-exchange rate volatility transmissions and hedging strategies," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 633-647, October.
    15. Hung, Jui-Cheng, 2015. "Evaluation of realized multi-power variations in minimum variance hedging," Economic Modelling, Elsevier, vol. 51(C), pages 672-679.
    16. Thomas Conlon & John Cotter & Ramazan Gençay, 2016. "Commodity futures hedging, risk aversion and the hedging horizon," The European Journal of Finance, Taylor & Francis Journals, vol. 22(15), pages 1534-1560, December.
    17. Alizadeh, Amir H. & Huang, Chih-Yueh & van Dellen, Stefan, 2015. "A regime switching approach for hedging tanker shipping freight rates," Energy Economics, Elsevier, vol. 49(C), pages 44-59.
    18. Dark, Jonathan, 2015. "Futures hedging with Markov switching vector error correction FIEGARCH and FIAPARCH," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 269-285.
    19. Hsiang-Tai Lee & Jonathan Yoder, 2007. "A bivariate Markov regime switching GARCH approach to estimate time varying minimum variance hedge ratios," Applied Economics, Taylor & Francis Journals, vol. 39(10), pages 1253-1265.
    20. Chen, Xiangyu & Tongurai, Jittima, 2021. "Cross-commodity hedging for illiquid futures: Evidence from China's base metal futures market," Global Finance Journal, Elsevier, vol. 49(C).

    More about this item

    Keywords

    carry cost rate; futures hedge ratio;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jjrfmx:v:12:y:2019:i:2:p:78-:d:227989. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.