The Asymmetric Commodity Inventory Effect on the Optimal Hedge Ratio
AbstractHedging strategies for commodity prices largely rely on dynamic models to compute optimal hedge ratios. This paper illustrates the importance of considering the commodity inventory effect (effect by which the commodity price volatility increases more after a positive shock than after a negative shock of the same magnitude) in modelling the variance-covariance dynamics. We show by in-sample and out-of-sample forecasts that a commodity price index portfolio optimized by an asymmetric BEKK-GARCH model outperforms the symmetric BEKK, static (OLS) or naÃ¯ve models. Robustness checks on a set of commodities and by an alternative mean-variance optimization framework confirm the relevance of taking into account the inventory effect in commodity hedging strategies.
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Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal Journal of Futures Markets.
Volume (Year): 33 (2013)
Issue (Month): 9 (09)
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Web page: http://www.interscience.wiley.com/jpages/0270-7314/
Other versions of this item:
- CARPANTIER, Jean-François & SAMKHARADZE, Besik, 2012. "The asymmetric commodity inventory effect on the optimal hedge ratio," CORE Discussion Papers 2012020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Global Commodity Market
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