Hi everyone
I am trying to estimate the optimal hedge variance ratio for cross
hedging two commodities. the price levels are used (compared to price
change and % price change) and used the OLS with dummy variable for
estimating the co-efficients. the equation looks like this
Y = B + B1*D1 + B2*X + B3*(X*D1)
Where Y = Daily Cash market price
D1 = Dummy variable taking value 1 for period Oct-Mar and 0 for Apr-Sep
X = Daily futures market price on which cross hedging is done.
B,B1,B2,B3 are the slope co-efficients.
The results look like this
Regression Statistics
Multiple R 0.948702709
R Square 0.900036831
Adjusted R Square 0.89981135
Standard Error 25.52050965
Observations 1334
Coefficients Standard Error t Stat P-value
Intercept 53.817 4.375 12.300 0.000
X 0.986 0.012 80.283 0.000
D1 27.399 6.106 4.487 0.000
D1 * X -0.100 0.017 -5.820 0.000
It is understood the slope co-efficients for different periods are
significant as indicated by t-table value. But I feel suspicious on
the reliability of this values.
I have used 5 years of daily price data for running the regression,
and I feel suscpicious becasue, the monthly correlations (pearson
correlation co-efficient) are highly varying between spot and futures
and some times even negative.
Can someone suggest me
a) the tests to judge the reliability of hedge-variance values
b) Is there any other better method than described here for estimating
the hedge-variance values
Thank you for the attention and look forward for an early reply
rgds
snvk