IDEAS home Printed from https://ideas.repec.org/a/sae/ausman/v27y2002i2p95-122.html
   My bibliography  Save this article

Bayesian Cross Hedging: An Example From the Soybean Market

Author

Listed:
  • F. Douglas Foster

    (Australian Graduate School of Management, UNSW, Sydney, NSW 2052. Email: fd.foster@unsw.edu.au.)

  • Charles H. Whiteman

    (Department of Economics, The University of Iowa, Iowa City, IA, 52242 USA. Email: whiteman@uiowa.edu.)

Abstract

Following Lence and Hayes (1994a), we study the problem faced by an Iowa farmer who wishes to hedge a soybean harvest using Chicago futures contracts. A time-series model for spot and futures prices is postulated, and numerical Bayesian procedures are used to calculate predictive densities and optimal hedges. The numerical procedures extend earlier analytical work, and easily accommodate alternative views about specification (levels vs. logarithms, trends vs. no trends, etc.), uncertainty about parameterisations (estimation risk), as well as other non-sample information (the likely size of the difference between spot prices in Iowa and Chicago, the tendency of the basis to be large in the spring, the shrinking of the basis as expiration of the future looms, etc.)

Suggested Citation

  • F. Douglas Foster & Charles H. Whiteman, 2002. "Bayesian Cross Hedging: An Example From the Soybean Market," Australian Journal of Management, Australian School of Business, vol. 27(2), pages 95-122, December.
    • Handle: RePEc:sae:ausman:v:27:y:2002:i:2:p:95-122
    DOI: 10.1177/031289620202700201
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/031289620202700201
    Download Restriction: no
    File URL: https://libkey.io/10.1177/031289620202700201?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Alexander, Gordon J & Resnick, Bruce G, 1985. "More on Estimation Risk and Simple Rules for Optimal Portfolio Selection," Journal of Finance, American Finance Association, vol. 40(1), pages 125-133, March.
    2. Clarkson, Peter M & Thompson, Rex, 1990. "Empirical Estimates of Beta When Investors Face Estimation Risk," Journal of Finance, American Finance Association, vol. 45(2), pages 431-453, June.
    3. Chen, Son-Nan & Brown, Stephen J, 1983. "Estimation Risk and Simple Rules for Optimal Portfolio Selection," Journal of Finance, American Finance Association, vol. 38(4), pages 1087-1093, September.
    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. Stutzer, Michael, 2013. "Optimal hedging via large deviation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(15), pages 3177-3182.
    2. Wei Shi & Scott H. Irwin, 2005. "Optimal Hedging with a Subjective View: An Empirical Bayesian Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 918-930.
    3. 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.
    4. Yang (Greg) Hou & Mark Holmes, 2020. "Do higher order moments of return distribution provide better decisions in minimum-variance hedging? Evidence from US stock index futures," Australian Journal of Management, Australian School of Business, vol. 45(2), pages 240-265, May.
    5. Chris Brooks & Ryan J. Davies & Sang Soo Kim, 2005. "Cross Hedging with Single Stock Futures," ICMA Centre Discussion Papers in Finance icma-dp2004-15, Henley Business School, University of Reading.
    6. David J. Pannell & Getu Hailu & Alfons Weersink & Amanda Burt, 2008. "More reasons why farmers have so little interest in futures markets," Agricultural Economics, International Association of Agricultural Economists, vol. 39(1), pages 41-50, July.

    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. Sergio H. Lence & Dermot J. Hayes, 1994. "The Empirical Minimum-Variance Hedge," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(1), pages 94-104.
    2. Richard C. Burgess & Roger P. Bey, 1988. "Optimal Portfolios: Markowitz Full Covariance Versus Simple Selection Rules," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 11(2), pages 153-163, June.
    3. Ter Horst, J.R. & de Roon, F.A. & Werker, B.J.M., 2000. "Incorporating Estimation Risk in Portfolio Choice," Discussion Paper 2000-65, Tilburg University, Center for Economic Research.
    4. Ter Horst, J.R. & de Roon, F.A. & Werker, B.J.M., 2000. "Incorporating Estimation Risk in Portfolio Choice," Other publications TiSEM 30107fbe-2dc9-43d5-a086-e, Tilburg University, School of Economics and Management.
    5. Seguin, P. J. & Smoller, M. M., 1997. "Share price and mortality: An empirical evaluation of newly listed Nasdaq stocks," Journal of Financial Economics, Elsevier, vol. 45(3), pages 333-363, September.
    6. Lence, Sergio H. & Hayes, Dermot J., 1995. "Land Allocation In The Presence Of Estimation Risk," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 20(1), pages 1-15, July.
    7. Eberhart, Allan C., 2001. "Comparable firms and the precision of equity valuations," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1367-1400, July.
    8. 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.
    9. Christian Leuz & Catherine Schrand, 2009. "Disclosure and the Cost of Capital: Evidence from Firms' Responses to the Enron Shock," NBER Working Papers 14897, National Bureau of Economic Research, Inc.
    10. Walsh, David M. & Walsh, Kathleen D. & Evans, John P., 1998. "Assessing estimation error in a tracking error variance minimisation framework," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 175-192, May.
    11. Karagiannidis, Iordanis & Vozlyublennaia, Nadia, 2016. "Limits to mutual funds' ability to rely on mean/variance optimization," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 282-292.
    12. Josef Schuster, 2003. "The Cross-Section of European IPO Returns," FMG Discussion Papers dp460, Financial Markets Group.
    13. Omaima Hassan & Claire Marston, 2010. "Disclosure measurement in the empirical accounting literature - a review article," Accountancy Discussion Papers 1004, Accountancy Research Group, Heriot Watt University.
    14. Schuster, Josef Anton, 2003. "IPOs: insights from seven European countries," LSE Research Online Documents on Economics 24860, London School of Economics and Political Science, LSE Library.
    15. DiTraglia, Francis J. & Gerlach, Jeffrey R., 2013. "Portfolio selection: An extreme value approach," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 305-323.
    16. Jimmy A. Saravia & Carlos S. García & Paula M. Almonacid, 2021. "The determinants of systematic risk: A firm lifecycle perspective," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1037-1049, January.
    17. Dębski Wiesław & Feder-Sempach Ewa & Świderski Bartosz, 2016. "Beta Stability Over Bull and Bear Market on the Warsaw Stock Exchange," Folia Oeconomica Stetinensia, Sciendo, vol. 16(1), pages 75-92, December.
    18. Sebehela, Tumellano, 2015. "Rationally financing an acquisition," Journal of Economics and Business, Elsevier, vol. 81(C), pages 1-20.
    19. Schuster, Josef Anton, 2003. "The cross-section of European IPO returns," LSE Research Online Documents on Economics 24859, London School of Economics and Political Science, LSE Library.
    20. Robert H. Keeley & Sanjeev Punjabi & Lassaad Turki, 1996. "Valuation of Early-Stage Ventures: Option Valuation Models vs. Traditional Approaches," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 5(2), pages 115-138, Summer.

    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:sae:ausman:v:27:y:2002:i:2:p:95-122. 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: SAGE Publications (email available below). General contact details of provider: http://www.agsm.edu.au .

    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.