A Note on Estimating the Benefit of a Composite Hedge

摘要

This note considers the estimator for the benefit of a composite hedge suggested in Chen and Sutcliffe (2007). It shows the estimator is a biased one and the estimated usefulness of a composite hedge is, therefore, unreliable. A composite hedge is a strategy that employs multiple derivative hedge instruments to reduce the risk associated with a spot asset. Chen and Sutcliffe (2007) characterized the scenarios when a composite hedge would outperform a simple hedge (where a single futures contract is applied for the purpose of hedging). Moreover, the improvement in the Ederington (1979) hedging effectiveness from a single hedge (where the spot asset is hedged with a single futures contract) to a composite hedge is applied to evaluate the benefit of the composite hedge.1 Chen and Sutcliffe (2007) documented empirical support for the composite hedge strategy. In this note, it is pointed out that the benefit measure adopted in Chen and Sutcliffe (2007) is biased.