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Asset storability and hedging effectiveness in commodity futures markets

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  • Jian Yang
  • Titus Awokuse

Abstract

This paper examines risk minimization hedging effectiveness for major storable and nonstorable agricultural commodity futures markets. Based on the error correction model - bivariate GARCH frameworks, some evidence is found that the hedging effectiveness is stronger for storable commodities than nonstorable commodities under consideration. The finding illustrates an important difference between storable and nonstorable commodities with regard to their hedging function.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 10 (2003)
Issue (Month): 8 ()
Pages: 487-491

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Handle: RePEc:taf:apeclt:v:10:y:2003:i:8:p:487-491

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  1. Michael S. Haigh & Matthew T. Holt, 2000. "Hedging Multiple Price Uncertainty in International Grain Trade," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 881-896.
  2. Peck, Anne E, 1976. "Futures Markets, Supply Response, and Price Stability," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 407-23, August.
  3. 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 109-24, April-Jun.
  4. Fleming, Jeff & Kirby, Chris & Ostdiek, Barbara, 1998. "Information and volatility linkages in the stock, bond, and money markets," Journal of Financial Economics, Elsevier, vol. 49(1), pages 111-137, July.
  5. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  6. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  7. Peter S. Sephton, 1993. "Optimal Hedge Ratios at the Winnipeg Commodity Exchange," Canadian Journal of Economics, Canadian Economics Association, vol. 26(1), pages 175-93, February.
  8. 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, EconWPA.
  9. Darbar, Salim M & Deb, Partha, 1997. "Co-movements in International Equity Markets," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 20(3), pages 305-22, Fall.
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Cited by:
  1. repec:wyi:journl:002103 is not listed on IDEAS
  2. Malo, Pekka, 2009. "Modeling electricity spot and futures price dependence: A multifrequency approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(22), pages 4763-4779.
  3. Dahl, Christian M. & Iglesias, Emma M., 2009. "Volatility spill-overs in commodity spot prices: New empirical results," Economic Modelling, Elsevier, vol. 26(3), pages 601-607, May.
  4. Zanotti, Giovanna & Gabbi, Giampaolo & Geranio, Manuela, 2010. "Hedging with futures: Efficacy of GARCH correlation models to European electricity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 135-148, April.
  5. 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.

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