Encyclopedia of Finance

2013 Edition
| Editors: Cheng-Few Lee, Alice C. Lee

Futures Hedge Ratios: A Review

  • Sheng-Syan Chen
  • Cheng-Few Lee
  • Keshab Shrestha
Reference work entry
DOI: https://doi.org/10.1007/978-1-4614-5360-4_74


This paper presents a review of different theoretical approaches to the optimal futures hedge ratios. These approaches are based on minimum variance, mean-variance, expected utility, mean extended-Gini coefficient, semivariance and Value-at-Risk. Various ways of estimating these hedge ratios are also discussed, ranging from simple ordinary least squares to complicated heteroscedastic cointegration methods. Under martingale and joint-normality conditions, different hedge ratios are the same as the minimum variance hedge ratio. Otherwise, the optimal hedge ratios based on the different approaches are in general different and there is no single optimal hedge ratio that is distinctly superior to the remaining ones.


Cointegration Gini coefficient Hedge ratio Minimum variance Semi variance 
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© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Sheng-Syan Chen
    • 1
  • Cheng-Few Lee
    • 2
    • 3
  • Keshab Shrestha
    • 4
  1. 1.Department of Finance, College of ManagementNational Taiwan UniversityTaipeiChina
  2. 2.Rutgers Business SchoolRutgers UniversityNew BrunswickUSA
  3. 3.Graduate Institute of FinanceNational Chiao Tung UniversityHsinchuChina
  4. 4.Risk Management InstituteNational University of SingaporeSingaporeSingapore