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Futures Hedges under Basis Heteroscedasticity
Joint Authors
Nayak, Subhankar
Schnabel, Jacques A.
Source
Issue
Vol. 2012, Issue 2012 (31 Dec. 2012), pp.1-5, 5 p.
Publisher
Hindawi Publishing Corporation
Publication Date
2012-12-12
Country of Publication
Egypt
No. of Pages
5
Main Subjects
Abstract EN
Minimum variance and mean-variance optimizing hedges are developed when basis risk exhibits heteroscedasticity; that is, the variance of the difference between spot and futures prices is not constant but rises with the level of spot prices.
Two different hedging objectives are modeled and optimized.
The resulting optimality conditions are then interpreted both analytically and intuitively.
Simulations are run to determine whether the model proposed here is superior to the traditional model in terms of minimizing the hedger’s terminal wealth.
The resulting hedge ratios are shown to differ from those that are obtained for the traditional homoscedastic basis case, but consistent with the extant theoretical paradigm, the demand for futures contacts is dichotomized into pure hedging and pure speculative components.
The simulations demonstrate that, under the statistical assumptions invoked, the proposed model implies uniformly less hedging and a lower variance of terminal wealth compared with the traditional model.
American Psychological Association (APA)
Nayak, Subhankar& Schnabel, Jacques A.. 2012. Futures Hedges under Basis Heteroscedasticity. ISRN Economics،Vol. 2012, no. 2012, pp.1-5.
https://search.emarefa.net/detail/BIM-475042
Modern Language Association (MLA)
Nayak, Subhankar& Schnabel, Jacques A.. Futures Hedges under Basis Heteroscedasticity. ISRN Economics No. 2012 (2012), pp.1-5.
https://search.emarefa.net/detail/BIM-475042
American Medical Association (AMA)
Nayak, Subhankar& Schnabel, Jacques A.. Futures Hedges under Basis Heteroscedasticity. ISRN Economics. 2012. Vol. 2012, no. 2012, pp.1-5.
https://search.emarefa.net/detail/BIM-475042
Data Type
Journal Articles
Language
English
Notes
Includes bibliographical references
Record ID
BIM-475042