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Hello everyone,Imagine I'm long in a stock called ABC.I want to hedge this position for a week.I know my stock has positive correlation with the STOXX Europe 600.I can sell a quantity of STOXX Europe 600 futures to do this hedge right?My question is, how do I determine the quantity?I think I could use the correlation coefficient to do this, or is better to use the beta of the stock against the index?If I use the correlation or the beta, what horizon of time should I use to compute the values? (1 year of historical returns? 3 years? 5 years? Less, more?)Thanks for your help!

Update: After a second thought, I think we should use the Beta to calculate the hedge ratio.The main question is what time frame should I use to compute the value?

same difference - the hedge ratio using correlation is [$] \rho \frac{\sigma _i}{\sigma _m}[$] and the beta of the stock is given by [$]\beta_i = \frac{\rho\sigma_i\sigma_m}{\sigma_m^2}[$]

Ok, thanks. But for computing the hedge ratio I need some historical returns. How much data should I use? I'm looking to adjust my hedge every week (if the signals I use tell me to do so). Should I use YTD returns? 1y returs? More?

I would regress historical returns over the most recent say 90 days. first of all make sure that the beta is statistically sound. look at the fit and the t-stats

did you look whether rolling correlation is constant through time say over a 2 year-period?

Not yet, but I'll do it and share the results with you this afternoon. Thanks for your help.