Hedging with Futures: A Second Generation Review

The first generation research on futures hedging covered various theoretical approaches to the determination of optimal future hedge ratios, such as minimum variance, mean-variance, expected utility, mean-extended-Gini coefficient and semi variance. It also highlighted alternative econometric methods of estimating hedge ratios ranging from simple ordinary least squares to different variants of sophisticated GARCH model. In this second-generation survey, we expand our horizon and illustrate how the existing literature is handling critical issues including structural breaks, information asymmetries, basis convergence, and maturity effects, cross and crack hedges, bid-ask spread and mispricing, multi-period hedging and selective hedging. It also surveys recent developments in estimation techniques that have greatly contributed to the conventional and dynamic hedging literature.