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The global minimum variance hedge

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  • Wan-Yi Chiu

    (National United University)

Abstract

We explore futures hedging based on the global minimum variance strategy. As evidenced by using eleven of the world’s major stock market indexes and their corresponding futures contracts, the results show that the global minimum variance hedge may deviate statistically from the Ederington (J Finance 43(1):157–170, 1979) minimum variance hedge. We also present a regression approach to testing the hedge ratios and futures positions when the noise terms follow a normal distribution. In the illustration examined, we show that the global minimum variance hedge provides a more economically significant information ratio yield than that under the minimum variance hedge.

Suggested Citation

  • Wan-Yi Chiu, 2020. "The global minimum variance hedge," Review of Derivatives Research, Springer, vol. 23(2), pages 121-144, July.
    • Handle: RePEc:kap:revdev:v:23:y:2020:i:2:d:10.1007_s11147-019-09159-8
    DOI: 10.1007/s11147-019-09159-8
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    References listed on IDEAS

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    Cited by:

    1. Wan-Yi Chiu, 2021. "Mean-variance hedging in the presence of estimation risk," Review of Derivatives Research, Springer, vol. 24(3), pages 221-241, October.

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    More about this item

    Keywords

    Minimum variance hedge; Global minimum variance hedge; Hedge boundary; Information ratio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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