The sensitivity of the optimal hedge ratio to model specification

This paper investigates the effect of the choice of the model used to estimate the hedge ratio on the effectiveness of futures and cross-currency hedging using data from the stock and foreign exchange markets. Four different models are used for this purpose to estimate the hedge ratio. The results show that model specification has little effect on the hedging effectiveness. It seems that what matters most is the correlation between the prices of the unhedged position and the hedging instrument.