IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v18y2009i1-2p58-65.html
   My bibliography  Save this article

Short-run deviations and time-varying hedge ratios: Evidence from agricultural futures markets

Author

Listed:
  • Choudhry, Taufiq

Abstract

This paper investigates the hedging effectiveness of time-varying hedge ratios in the agricultural commodities futures markets using four different versions of the GARCH models. The GARCH models applied are the standard bivariate GARCH, the bivariate BEKK GARCH, the bivariate GARCH-X and the bivariate BEKK GARCH-X. Futures data for corn, coffee, wheat, sugar, soybeans, live cattle and hogs are applied. Comparison of the hedging effectiveness is done for the within sample period (1980-2004), and two out-of-sample periods (2002-2004 and 2003-2004). Results indicate superior performance of the portfolios based on the GARCH-X model estimated hedge ratio during all periods.

Suggested Citation

  • Choudhry, Taufiq, 2009. "Short-run deviations and time-varying hedge ratios: Evidence from agricultural futures markets," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 58-65, March.
    • Handle: RePEc:eee:finana:v:18:y:2009:i:1-2:p:58-65
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057-5219(08)00056-2
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    2. Jian Yang & Titus Awokuse, 2003. "Asset storability and hedging effectiveness in commodity futures markets," Applied Economics Letters, Taylor & Francis Journals, vol. 10(8), pages 487-491.
    3. Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988. "Estimation of the Optimal Futures Hedge," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 623-630, November.
    4. Tomek, William G., 2000. "Commodity Prices Revisited," Staff Papers 121146, Cornell University, Department of Applied Economics and Management.
    5. Brorsen, B. Wade & Fofana, N'Zue F., 2001. "Success And Failure Of Agricultural Futures Contracts," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 19(2), pages 1-17.
    6. Calum G. Turvey & Timothy G. Baker, 1989. "Optimal Hedging under Alternative Capital Structures and Risk Aversion," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 37(1), pages 135-143, March.
    7. B. Wade Brorsen, 1995. "Optimal Hedge Ratios with Risk-Neutral Producers and Nonlinear Borrowing Costs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(1), pages 174-181.
    8. T. Randall Fortenbery & Hector O. Zapata, 1997. "An evaluation of price linkages between futures and cash markets for cheddar cheese," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 17(3), pages 279-301, May.
    9. Moschini, GianCarlo & Myers, Robert J., 2002. "Testing for constant hedge ratios in commodity markets: a multivariate GARCH approach," Journal of Empirical Finance, Elsevier, vol. 9(5), pages 589-603, December.
    10. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-124, April-Jun.
    11. Ghosh, Asim, 1995. "The Hedging Effectiveness of ECU Futures Contracts: Forecasting Evidence from an Error Correction Model," The Financial Review, Eastern Finance Association, vol. 30(3), pages 567-581, August.
    12. Tim Bollerslev, 1988. "On The Correlation Structure For The Generalized Autoregressive Conditional Heteroskedastic Process," Journal of Time Series Analysis, Wiley Blackwell, vol. 9(2), pages 121-131, March.
    13. Ghosh, Asim & Clayton, Ronnie, 1996. "Hedging with International Stock Index Futures: An Intertemporal Error Correction Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(4), pages 477-491, Winter.
    14. Dabin Wang & William G. Tomek, 2007. "Commodity Prices and Unit Root Tests," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 873-889.
    15. Tomek, William G., 2000. "Commodity Prices Revisited," Agricultural and Resource Economics Review, Cambridge University Press, vol. 29(2), pages 125-137, October.
    16. Asim Ghosh & Ronnie Clayton, 1996. "Hedging With International Stock Index Futures: An Intertemporal Error Correction Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(4), pages 477-491, December.
    17. Lee, Tae-Hwy, 1994. "Spread and volatility in spot and forward exchange rates," Journal of International Money and Finance, Elsevier, vol. 13(3), pages 375-383, June.
    18. T. Randall Fortenbery & Hector O. Zapata, 1993. "An examination of cointegration relations between futures and local grain markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(8), pages 921-932, December.
    19. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(4), pages 535-551, December.
    20. Peter S. Sephton, 1993. "Optimal Hedge Ratios at the Winnipeg Commodity Exchange," Canadian Journal of Economics, Canadian Economics Association, vol. 26(1), pages 175-193, February.
    21. Anil K. Bera & Philip Garcia & Jae-Sun Roh, 1997. "Estimation of Time-Varying Hedge Ratios for Corn and Soybeans: BGARCH and Random Coefficient Approaches," Finance 9712007, University Library of Munich, Germany.
    22. K. Giannopoulos, 1995. "Estimating the time Varying Components of international stock markets' risk," The European Journal of Finance, Taylor & Francis Journals, vol. 1(2), pages 129-164.
    23. Covey, Ted & Bessler, David A, 1992. "Testing for Granger's Full Causality," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 146-153, February.
    24. Darren L. Frechette, 1997. "The Dynamics of Convenience and the Brazilian Soybean Boom," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1108-1118.
    25. Tomek, William G., 2000. "Commodity Prices Revisited," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 29(2), pages 1-13, October.
    26. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hammoudeh, Shawkat M. & Yuan, Yuan & McAleer, Michael & Thompson, Mark A., 2010. "Precious metals-exchange rate volatility transmissions and hedging strategies," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 633-647, October.
    2. Raushan Kumar, 2021. "Predicting Wheat Futures Prices in India," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(1), pages 121-140, March.
    3. Białkowski, Jędrzej & Bohl, Martin T. & Perera, Devmali, 2023. "Commodity futures hedge ratios: A meta-analysis," Journal of Commodity Markets, Elsevier, vol. 30(C).
    4. Chiang, Shu-Mei & Chen, Chun-Da & Huang, Chien-Ming, 2019. "Analyzing the impacts of foreign exchange and oil price on biofuel commodity futures," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 37-48.
    5. Meenakshi Malhotra, 2015. "Evaluating the Hedging Performance of Oil and Oilseeds Futures in India," Paradigm, , vol. 19(2), pages 184-196, December.
    6. Naeem, Muhammad Abubakr & Hasan, Mudassar & Arif, Muhammad & Suleman, Muhammad Tahir & Kang, Sang Hoon, 2022. "Oil and gold as a hedge and safe-haven for metals and agricultural commodities with portfolio implications," Energy Economics, Elsevier, vol. 105(C).
    7. Michal Černý & Jan Pelikán, 2012. "A note on imperfect hedging: a method for testing stability of the hedge ratio," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 60(2), pages 45-50.
    8. Caporin, Massimiliano, 2013. "Equity and CDS sector indices: Dynamic models and risk hedging," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 261-275.
    9. Jędrzej Białkowski & Martin T. Bohl & Devmali Perera, 2022. "Commodity Futures Hedge Ratios: A Meta-Analysis," Working Papers in Economics 22/12, University of Canterbury, Department of Economics and Finance.
    10. Lu, Xinjie & Su, Yuandong & Huang, Dengshi, 2023. "Chinese agricultural futures volatility: New insights from potential domestic and global predictors," International Review of Financial Analysis, Elsevier, vol. 89(C).
    11. Habibeh Sherafatmand & Saeed Yazdani, 2014. "The management of price risk in Iranian dates: An application of futures instruments," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-12, December.
    12. Spencer, Simon & Bredin, Don & Conlon, Thomas, 2018. "Energy and agricultural commodities revealed through hedging characteristics: Evidence from developing and mature markets," Journal of Commodity Markets, Elsevier, vol. 9(C), pages 1-20.
    13. Anton Bekkerman, 2011. "Time‐varying hedge ratios in linked agricultural markets," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 71(2), pages 179-200, August.
    14. Wen-Chung Hsu & Hsiang-Tai Lee, 2018. "Cross Hedging Stock Sector Risk with Index Futures by Considering the Global Equity Systematic Risk," IJFS, MDPI, vol. 6(2), pages 1-17, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Corbet, Shaen & Hou, Yang (Greg) & Hu, Yang & Oxley, Les, 2022. "The influence of the COVID-19 pandemic on the hedging functionality of Chinese financial markets," Research in International Business and Finance, Elsevier, vol. 59(C).
    2. Qu, Hui & Wang, Tianyang & Zhang, Yi & Sun, Pengfei, 2019. "Dynamic hedging using the realized minimum-variance hedge ratio approach – Examination of the CSI 300 index futures," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    3. Choudhry, Taufiq, 2003. "Short-run deviations and optimal hedge ratio: evidence from stock futures," Journal of Multinational Financial Management, Elsevier, vol. 13(2), pages 171-192, April.
    4. Caporin, Massimiliano, 2013. "Equity and CDS sector indices: Dynamic models and risk hedging," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 261-275.
    5. Bessler, Wolfgang & Leonhardt, Alexander & Wolff, Dominik, 2016. "Analyzing hedging strategies for fixed income portfolios: A Bayesian approach for model selection," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 239-256.
    6. Rozaimah Zainudin & Roselee Shah Shaharudin, 2011. "Multi Mean Garch Approach to Evaluating Hedging Performance in the Crude Palm Oil Futures Market," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 7(1), pages 111-130.
    7. Christos Floros & Dimitrios Vougas, 2004. "Hedge ratios in Greek stock index futures market," Applied Financial Economics, Taylor & Francis Journals, vol. 14(15), pages 1125-1136.
    8. Anton Bekkerman, 2011. "Time‐varying hedge ratios in linked agricultural markets," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 71(2), pages 179-200, August.
    9. McKenzie, Michael D. & Brooks, Robert D. & Faff, Robert W. & Ho, Yew Kee, 2000. "Exploring the economic rationale of extremes in GARCH generated betas The case of U.S. banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(1), pages 85-106.
    10. Stavros Degiannakis & Christos Floros & Enrique Salvador & Dimitrios Vougas, 2022. "On the stationarity of futures hedge ratios," Operational Research, Springer, vol. 22(3), pages 2281-2303, July.
    11. Michael S. Haigh & Matthew T. Holt, 2002. "Combining time-varying and dynamic multi-period optimal hedging models," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 29(4), pages 471-500, December.
    12. Choudhry, Taufiq, 2004. "The hedging effectiveness of constant and time-varying hedge ratios using three Pacific Basin stock futures," International Review of Economics & Finance, Elsevier, vol. 13(4), pages 371-385.
    13. John Hua Fan & Eduardo Roca & Alexandr Akimov, 2014. "Estimation and performance evaluation of optimal hedge ratios in the carbon market of the European Union Emissions Trading Scheme," Australian Journal of Management, Australian School of Business, vol. 39(1), pages 73-91, February.
    14. repec:wyi:journl:002103 is not listed on IDEAS
    15. Chang, Chiao-Yi & Lai, Jing-Yi & Chuang, I-Yuan, 2010. "Futures hedging effectiveness under the segmentation of bear/bull energy markets," Energy Economics, Elsevier, vol. 32(2), pages 442-449, March.
    16. David Watt, 1997. "Canadian Short-Term Interest Rates and the BAX Futures Markets: An Analysis of the Impact of Volatility on Hedging Activity and the Correlation of Returns Between Markets," Staff Working Papers 97-18, Bank of Canada.
    17. Jonathan Dark, 2004. "Long term hedging of the Australian All Ordinaries Index using a bivariate error correction FIGARCH model," Monash Econometrics and Business Statistics Working Papers 7/04, Monash University, Department of Econometrics and Business Statistics.
    18. Ah-Boon Sim & Ralf Zurbruegg, 2001. "Optimal hedge ratios and alternative hedging strategies in the presence of cointegrated time-varying risks," The European Journal of Finance, Taylor & Francis Journals, vol. 7(3), pages 269-283.
    19. Power, Gabriel J. & Vedenov, Dmitry V., 2008. "The Shape of the Optimal Hedge Ratio: Modeling Joint Spot-Futures Prices using an Empirical Copula-GARCH Model," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37609, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    20. Gagnon, Louis & Lypny, Gregory J. & McCurdy, Thomas H., 1998. "Hedging foreign currency portfolios," Journal of Empirical Finance, Elsevier, vol. 5(3), pages 197-220, September.
    21. Vicente Meneu & Hipòlit Torró, 2003. "Asymmetric covariance in spot‐futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(11), pages 1019-1046, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:18:y:2009:i:1-2:p:58-65. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.