ISSN: 2056-3736 (Online Version) | 2056-3728 (Print Version)

Hedge ratio estimation: A note on the Bitcoin future contract

Koulis Alexandros and Constantinos Kyriakopoulos

Correspondence: Koulis Alexandros,

Department of Regional Development, Ionian University, Greece

pdf (412.67 Kb) | doi:


This paper investigates the hedging effectiveness of Bitcoin (BTC) future contract using daily settlement prices for the period of 1 January 2018 until 26 March 2021. Standard OLS regressions, Error Correction Model (ECM), as well as GARCH and EGARCH models are used to estimate the optimal hedge ratio which is necessary for trading and risk management. The findings indicate that the time varying hedge ratios, if estimated through the Error Correction Model (ECM), are more efficient than the fixed hedge ratios in terms of risk minimization.


  Optimal hedge ratio, hedging models, bitcoin, futures market


Beneki, C., Koulis, A., Kyriazis, N. A., & Papadamou, S. (2019). Investigating volatility transmission and hedging properties between Bitcoin and Ethereum. Research in International Business and Finance, 48, 219-227.

Bollerslev, T. (1986) ‘A generalized autoregressive conditional heteroscedasticity’, Journal of Econometrics, 31(3), 307–327.

Butterworth, D. and Holmes, P. (2001) ‘The hedging effectiveness of stock index futures: evidence for the FTSE-100 and FTSE-Mid 250 indexes traded in the UK’, Applied Financial Economics, Vol. 11, pp.57–68.

Chen, SS, CF Lee and K Shrestha (2001). On a mean-generalized semivariance approach to determining the hedge ratio. Journal of Futures Markets, 21, 581–598.

Deng, J., Pan, H., Zhang, S., & Zou, B. (2020). Minimum-variance hedging of Bitcoin inverse futures. Applied Economics, 52(58), 6320-6337.

Ederington, Louis H. (1979) The hedging performance of the new futures markets." The Journal of Finance 34.1: 157-170.

Engle, R. and Granger, C. (1987). Cointegration and error correction: representation, estimation and testing, Econometrica, 251–276.

Herbst, A. F., Kare, D. D., & Caples, S. C. (1989). Hedging effectiveness and minimum risk hedge ratios in the presence of autocorrelation: Foreign currency futures. Journal of Futures Markets, 9(3), 185-197.

Johnson, L. L., (1960). The theory of hedging and speculation in commodity futures, Review of Economic Studies, 27, 139–151.

Kenourgios, D., Samitas, A., & Drosos, P. (2008). Hedge ratio estimation and hedging effectiveness: the case of the S&P 500 stock index futures contract. International Journal of Risk assessment and management, 9(1-2), 121-134.

Koulis, A., Beneki, C., & Kaimakamis, G. (2018). Hedging effectiveness for international index futures markets. Economics and Business, 32(1), 149-159.

Lee, C. F., Wang, K., & Chen, Y. L. (2009). Hedging and optimal hedge ratios for international index futures markets. Review of Pacific Basin Financial Markets and Policies, 12(04), 593-610.

Lypny, G. and Powalla, M. (1998) ‘The hedging effectiveness of DAX futures’, The European Journal of Finance, 4(4), 345–355.

Nelson, D.B. (1991) ‘Conditional heteroskedasticity in asset returns: a new approach’, Econometrica, 347–370.

Pal, D., & Mitra, S. K. (2019). Hedging bitcoin with other financial assets. Finance Research Letters, 30, 30-36.

Park, H. Y., & Bera, A. K. (1987). Interest‐Rate Volatility, Basis Risk and Heteroscedasticity in Hedging Mortgages. Real Estate Economics, 15(2), 79-97.

Sah, A. N., & Pandey, K. K. (2011). Hedging effectiveness of index futures contract: The case of S&P CNX Nifty. Global Journal of Finance and Management, 3(1), 77-89.

Sebastião, H., & Godinho, P. (2020). Bitcoin futures: An effective tool for hedging cryptocurrencies. Finance Research Letters, 33, 101230.

Switzer, LN and M El-Khoury (2007). Extreme volatility, speculative efficiency, and the hedging effectiveness of the oil futures markets. Journal of Futures Markets, 27, 61–84.

Wang, J., & Hsu, H. (2010). Hedge Ratio Stability and Hedging Effectiveness of Time‐Varying Hedge Ratios in Volatile Index Futures Markets: Evidence from the Asian Financial Crisis. Asia‐Pacific Journal of Financial Studies, 39(5), 659-686.

Zhou, J. (2016). Hedging performance of REIT index futures: A comparison of alternative hedge ratio estimation methods. Economic Modelling, 52, 690-698.