Hedging with a generalized basis risk: empirical results

M. Alghalith, R. Lalloo, M. Franklin, Christos Floros

    Research output: Contribution to journalArticlepeer-review


    Previous research assumes that 1) the futures price is a linear function of the market (spot) price and basis risk; 2) the spot price and basis risk are statistically independent. Using a general form of basis risk, we provide empirical comparative statics results. Moreover, we relax the statistical independence assumption. Our monthly data series covers the period March 2000 to 2010, and includes the Henry Hub spot price, futures price and the quantity of natural gas and the hedged quantity. The results show that 1) an increase in the price riskiness increases the optimal hedge; 2) a higher basis risk implies a riskier hedging; 3) a higher correlation between the prices implies a riskier hedging.
    Original languageEnglish
    Pages (from-to)244-248
    Number of pages5
    JournalInternational Journal of Financial Markets and Derivatives
    Issue number3
    Publication statusPublished - 2011


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