[R-sig-finance] help on optimal hedge variance ratio required
a.trapletti at swissonline.ch
Fri Aug 12 13:16:42 CEST 2005
>I am trying to estimate the optimal hedge variance ratio for cross
>hedging two commodities. the price levels are used (compared to price
>change and % price change) and used the OLS with dummy variable for
>estimating the co-efficients. the equation looks like this
>Y = B + B1*D1 + B2*X + B3*(X*D1)
>Where Y = Daily Cash market price
>D1 = Dummy variable taking value 1 for period Oct-Mar and 0 for Apr-Sep
>X = Daily futures market price on which cross hedging is done.
>B,B1,B2,B3 are the slope co-efficients.
>The results look like this
>Multiple R 0.948702709
>R Square 0.900036831
>Adjusted R Square 0.89981135
>Standard Error 25.52050965
> Coefficients Standard Error t Stat P-value
>Intercept 53.817 4.375 12.300 0.000
>X 0.986 0.012 80.283 0.000
>D1 27.399 6.106 4.487 0.000
>D1 * X -0.100 0.017 -5.820 0.000
>It is understood the slope co-efficients for different periods are
>significant as indicated by t-table value. But I feel suspicious on
>the reliability of this values.
>I have used 5 years of daily price data for running the regression,
>and I feel suscpicious becasue, the monthly correlations (pearson
>correlation co-efficient) are highly varying between spot and futures
>and some times even negative.
>Can someone suggest me
>a) the tests to judge the reliability of hedge-variance values
>b) Is there any other better method than described here for estimating
>the hedge-variance values
>Thank you for the attention and look forward for an early reply
I guess your results are highly affected by spurious regression. You
should work with stationary variables such as the % price change and
include knowledge about the relationship between spot and futures markets.
Phone : +41 (0) 44 9945630
Mobile : +41 (0) 76 3705631
Email : a.trapletti at swissonline.ch
More information about the R-sig-finance