If futures contracts are being settled daily, why do we regress percentage changes in spot price over percentage changes in future price to get the minimum variance hedge ratio when cross hedging? Like why not regress absolute changes here?
Hull does this and I have no idea why.
Hull (and others) do this because the ratio of spot to the future is non stationary. Even if we were to simplify this down and only look back in time when the future is exactly X time away from expiration, there would be many differences in the ratio of spot to future (interest rate changes, storage costs, ...). Changing each to the percent helps to control for this.
