Generalized Hedge Ratio Estimation with an Unknown Model
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Myers and Thompson (1989) noted that the model specification could have a large impact on the hedge ratio estimated. A huge literature exists on estimating hedge ratios, but the literature is lacking a formal treatment of model specification uncertainty. This research accomplishes that task by taking a Bayesian approach to hedge ratio estimation, where specification uncertainty is explicitly modeled. The methodology is applied to data on hedging of corn and soybeans and on cross-hedging of corn oil using soybean oil futures. Results show the potential benefits and insights gained from such an approach.