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The Hedging Effectiveness of ECU Futures Contracts: Forecasting Evidence from an Error Correction Model

The Hedging Effectiveness of ECU Futures Contracts: Forecasting Evidence from an Error Correction... In this paper, the traditional price change hedge ratio estimation method is extended by applying the theory of cointegration in case of hedging with European Currency Unit (ECU) futures contracts. Previous studies ignore the last period's equilibrium error and short‐run deviations. The findings of this study indicate that the hedge ratio estimated by the error correction method is superior to the one obtained from the traditional method, as evidenced by the likelihood ratio test and out‐of‐sample forecasts. Hedgers can control the risk of their portfolios more effectively at a lower cost. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Financial Review Wiley

The Hedging Effectiveness of ECU Futures Contracts: Forecasting Evidence from an Error Correction Model

The Financial Review , Volume 30 (3) – Aug 1, 1995

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References (21)

Publisher
Wiley
Copyright
Copyright © 1995 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0732-8516
eISSN
1540-6288
DOI
10.1111/j.1540-6288.1995.tb00846.x
Publisher site
See Article on Publisher Site

Abstract

In this paper, the traditional price change hedge ratio estimation method is extended by applying the theory of cointegration in case of hedging with European Currency Unit (ECU) futures contracts. Previous studies ignore the last period's equilibrium error and short‐run deviations. The findings of this study indicate that the hedge ratio estimated by the error correction method is superior to the one obtained from the traditional method, as evidenced by the likelihood ratio test and out‐of‐sample forecasts. Hedgers can control the risk of their portfolios more effectively at a lower cost.

Journal

The Financial ReviewWiley

Published: Aug 1, 1995

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