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Publication - Dr Evarist Stoja

    The Limits to Minimum Variance Hedging


    Stoja, E, Harris, J, Shen, Ra & , 2010, ‘The Limits to Minimum Variance Hedging’. Journal of Business Finance and Accounting, vol 37., pp. 737 - 761


    In this paper, we compare the estimated minimum-variance hedge ratios from a range of conditional hedging models with the ‘realized’ minimum variance hedge ratio constructed using intraday data. We show that the reduction in conditionally hedged portfolio variance falls far short of the ex post maximal reduction in variance obtained using the realized minimum variance hedge ratio. While this is partly due to systematic bias, correcting for this bias does little to improve hedging effectiveness. The poor performance of conditional hedging models is therefore more likely to be attributable to the unpredictability of the integrated hedge ratio.

    Full details in the University publications repository