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Dynamic Conditional Bias-Adjusted Carry Cost Rate Futures Hedge Ratios

Author

Listed:
  • Dean Leistikow

    (Gabelli School of Business, Fordham University, 140 West 62nd Street, New York, NY 10023, USA)

  • Yi Tang

    (Gabelli School of Business, Fordham University, 140 West 62nd Street, New York, NY 10023, USA)

  • Wei Zhang

    (Gabelli School of Business, Fordham University, 140 West 62nd Street, New York, NY 10023, USA)

Abstract

This paper proposes new dynamic conditional futures hedge ratios and compares their hedging performances along with those of common benchmark hedge ratios across three broad asset classes. Three of the hedge ratios are based on the upward-biased carry cost rate hedge ratio, where each is augmented in a different bias-mitigating way. The carry cost rate hedge ratio augmented with the dynamic conditional correlation between spot and futures price changes generally: (1) provides the highest hedging effectiveness and (2) has a statistically significantly higher hedging effectiveness than the other hedge ratios across assets, sub-periods, and rolling window sizes.

Suggested Citation

  • Dean Leistikow & Yi Tang & Wei Zhang, 2022. "Dynamic Conditional Bias-Adjusted Carry Cost Rate Futures Hedge Ratios," JRFM, MDPI, vol. 15(1), pages 1-17, January.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:1:p:12-:d:716572
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    References listed on IDEAS

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    2. 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.
    3. Bali, Turan G. & Engle, Robert F., 2010. "The intertemporal capital asset pricing model with dynamic conditional correlations," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 377-390, May.
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