The hedging effectiveness
of the SDE-MV model outperforms the MV model and the FSDE model; thus the SDE-MV model performs better both in sample and out of sample when the Hurst parameter of the spot is larger than the futures.
Our results show that purchasing gap insurance can generally increase the hedging effectiveness
in multiple ways by reducing basis risk, thus increasing shareholder value and, at the same time, lowering shortfall risk.
For explanation of hedging effectiveness
, basis risk and derivation of hedge ratio, see, among others, Hull (2012).
Overall, the results are comparable to the baseline results, suggesting that the conclusion made earlier with respect to the larger estimation period still hold in general and in particular the institutional involvement is related to the hedging effectiveness
of real estate stocks.
Based on the out of sample hedging effectiveness
given by the variance reduction, the methods are compared.
In addition, for any given model the more "exotic" the option, the poorer the hedging effectiveness
The underlying index, which is derived from the price of a basket of routes, could not hedge well for individual route because hedging effectiveness
is directly related to the underlying risk.
There are three primary methods of testing the hedging effectiveness
of forwards, futures, and swaps when the critical terms of the hedging derivative and the hedged item are not identical: the dollar-offset method, the variability-reduction method, and the regression method.
TABLE 1 Measuring the Hedging Effectiveness
of an Aluminum Forward Hedge Using the Dollar-Offset Method, 1998-2000 (a) 1998 1998 1998 1998 1999 1999 1999 Quarter 1 2 3 4 1 2 3 Current Quarter's Data Including forward premium 0.
Yau, Hill and Schneeweis (1990) studied the hedging effectiveness
of the Nikkei 225 contract under three hedging analytical frameworks.
They have helped us build portfolio stress-tests that enable us to measure the impact of worst-case market scenarios on our hedging effectiveness
as well as risk decomposition tools to support our risk budgeting process.
Sensitivity analysis concludes the research by exploring the impact of basis risk, variable hedging cost, jump volatility, and jump intensity on hedging effectiveness