Estimation of Optimal Hedge Ratio in Different Time-Scales: Wavelet Analysis Approach

This paper examines the relationship between the spot and futures markets of gold coin in the different time-scales, and estimates the hedge ratio in the various investment horizons using wavelet analysis. For this purpose, maximal overlap discrete wavelet transform approach is used. Empirical results show that wavelet variance of return in both of the spot and futures markets decreases as the wavelet time scale increases. According to the estimated correlation ratio, there is a positive relationship between the spot and futures markets increases over the investment horizons. Optimal Hedge ratio and the effectiveness of hedging strategies increase as the wavelet time scale increases, and simulation for utility comparisons shows that hedging effectiveness depends not only on the time scale but also on the risk aversion coefficient of an individual investor.