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Optimal Hedging Ratios for Wheat and Barley at the LIFFE: A GARCH Approach

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  • P. J. Dawson
  • A. L. Tiffin
  • B. White

Abstract

Over 100,000 futures contracts for cereals are traded annually on the London International Financial Futures Exchange. The proportion of the spot position held as futures contracts ‐ the hedging ratio ‐ is critical to traders and traditional estimates, using OLS, are constant over time. In this paper, we estimate time‐varying hedging ratios for wheat and barley contracts using a multivariate generalised autoregressive conditional heteroscedasticity (GARCH) model. Results indicate that GARCH hedging ratios do change through time. Moreover, risk using the GARCH hedge is reduced significantly by around 4 per cent for wheat and 2 per cent for barley relative to the no hedge position, and significantly by around 0.2 per cent relative to the constant hedge. The optimal, expected utility‐maximising, and the risk‐minimising hedging ratios are equivalent.

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  • P. J. Dawson & A. L. Tiffin & B. White, 2000. "Optimal Hedging Ratios for Wheat and Barley at the LIFFE: A GARCH Approach," Journal of Agricultural Economics, Wiley Blackwell, vol. 51(2), pages 147-161, May.
    • Handle: RePEc:bla:jageco:v:51:y:2000:i:2:p:147-161
    DOI: 10.1111/j.1477-9552.2000.tb01220.x
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    References listed on IDEAS

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    1. Maurice J. Roche & Kieran McQuinn, 2003. "Grain price volatility in a small open economy," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 30(1), pages 77-98, March.
    2. Roche, M. & McQuinn, K., 2003. "Efficient allocation of land in a decoupled world," Economics Department Working Paper Series n1190103, Department of Economics, National University of Ireland - Maynooth.
    3. Darren Butterworth & Phil Holmes, 2005. "The Hedging Effectiveness of U.K. Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts," Multinational Finance Journal, Multinational Finance Journal, vol. 9(3-4), pages 131-160, September.
    4. Guo, Zhibo & White, Ben & Mugera, Amin, 2013. "Hedge Effectiveness for Western Australia Crops," 2013 Conference (57th), February 5-8, 2013, Sydney, Australia 152154, Australian Agricultural and Resource Economics Society.
    5. Kuwornu, John K.M. & Kuiper, W. Erno & Pennings, Joost M.E. & Meulenberg, Matthew T.G., 2006. "Risk Management Using Futures Contracts: The Impact of Spot Market Contracts and Production Horizons on the Optimal Hedge Ratio," 99th Seminar, February 8-10, 2006, Bonn, Germany 7755, European Association of Agricultural Economists.
    6. Xing, Liu & Pietola, Kyosti, 2005. "Forward Hedging Under Price and Production Risk of Wheat," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24467, European Association of Agricultural Economists.
    7. Vollmer, Teresa & von Cramon-Taubadel, Stephan, 2020. "The Optimal Wheat Futures Hedge at the Euronext Paris from a Farmer’s Perspective," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 69(1), March.

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