Hedge ratio estimation: A note on the Bitcoin future contract

Abstract

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.