Derivative pricing model and time-series approaches to hedging: A comparison Academic Article uri icon


  • This research compares derivative pricing model and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and inference, we find that the derivative pricing models cannot out-perform a vector error-correction model with a GARCH error structure. The derivative pricing models' unpalatable assumption of deterministically evolving futures volatility seems to impede their hedging effectiveness, even when potentially foresighted option-implied volatility term structures are employed. 2005 Wiley Periodicals, Inc.

published proceedings


author list (cited authors)

  • Bryant, H. L., & Haigh, M. S.

citation count

  • 9

complete list of authors

  • Bryant, HL||Haigh, MS

publication date

  • July 2005