The Performance of the A0( ) Diffusion Model to Hedge a Forward Commitment in the Corn Market
AbstractThis paper offers an extensive out-of-sample empirical analysis of the problem of hedging a long-term forward exposure in the corn commodity market by trading in short-term commodity futures contracts. A closed-form pricing formula for the forward curve is derived using the canonical A0(N) representation of Dai and Singleton (2000), with N £ 3. The resulting optimal hedge ratio is a function of, among others, the hedging horizon and the maturity of the traded contracts used as hedge instruments, making the method straightforward to apply for longer hedging horizons. The out-of-sample hedging performance of the model strategies for hedging horizons of 10, 50 and 100 weeks are compared, in a meanvariance framework, to the no-hedge and one-to-one hedge strategies. The findings indicate that the A0(N) model strategies are generally better than the no-hedge and the one-toone hedge
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Bibliographic InfoArticle provided by Katholieke Universiteit Leuven, Faculteit Economie en Bedrijfswetenschappen in its journal Review of Business and Economics.
Volume (Year): LIII (2008)
Issue (Month): 4 ()
Hedging; agricultural markets; Kalman filtering; futures pricing;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
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