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Cross hedging under multiplicative basis risk
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Adam-Müller, Axel F.A. and Nolte, Ingmar. (2011) Cross hedging under multiplicative basis risk. Journal of Banking & Finance, Vol.35 (No.11). pp. 2956-2964. ISSN 0378-4266
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Official URL: http://dx.doi.org/10.1016/j.jbankfin.2011.03.022
Abstract
Cross hedging price risk in an incomplete financial market creates basis risk. We propose a new way of modeling basis risk where price risk and basis risk are combined in a multiplicative way. Under this specification, positive prudence is a necessary and sufficient condition for underhedging in an unbiased market. Using the example of cross hedging jet fuel price risk with crude oil futures, we show that the new specification is superior in describing the price series and that optimal cross hedges differ significantly from those derived under the traditional additive cross hedging model. (C) 2011 Elsevier B.V. All rights reserved.
| Item Type: | Journal Article |
|---|---|
| Subjects: | H Social Sciences > HG Finance |
| Divisions: | Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
| Journal or Publication Title: | Journal of Banking & Finance |
| Publisher: | Elsevier Science BV |
| ISSN: | 0378-4266 |
| Date: | 2011 |
| Volume: | Vol.35 |
| Number: | No.11 |
| Number of Pages: | 9 |
| Page Range: | pp. 2956-2964 |
| Identification Number: | 10.1016/j.jbankfin.2011.03.022 |
| Status: | Peer Reviewed |
| Publication Status: | Published |
| Access rights to Published version: | Restricted or Subscription Access |
| URI: | http://wrap.warwick.ac.uk/id/eprint/39612 |
Data sourced from Thomson Reuters' Web of Knowledge
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