The Economic Value of Minimum Variance Hedges

The present art icle examines the potential economic gains from "better " min imum-var iance hedge (MVH) est imates, focusing on the assumptions that yield MVHs consistent with expected-ut i l i ty maximizat ion. It is found that the economic value of "better " MVH est imates is negl igible, and that optimal hedges are substant ia l ly di f ferent f rom MVHs when the usual MVH restr ict ions are relaxed. Among other things, f indings suggest hat the hedging research's recent emphasis on "better" MVHs has been a waste of resources. Invest igat ing the consequences of re laxing the standard MVH assumptions eems to be much more important han recent l i terature contr ibut ions. Key words: futures, hedging, min imum-var iance hedge, risk management. Stein and Johnson's seminal work on optimal hedging under the expected-utility paradigm has produced a large literature on normative hedging. With few exceptions (e.g., Cecchetti, Cumby, and Figlewski), the focus of the litera