Hedging effectiveness is the proportion of price risk removed through hedging. Empirical hedging studies typically estimate a set of risk minimizing hedge ratios, estimate the hedging effectiveness statistic, apply the estimated hedge ratios to a second group of data, and examine the robustness...

This study focuses on hedging effectiveness defined as the proportionate price risk reduction created by hedging. By mathematical and simulation analysis we determine the following: (a) the regression R2 in the hedge ratio regression will generally overstate the amount of price risk reduction...