Advanced Search
MyIDEAS: Login

Dynamic Cross-Hedge Ratios: An Application of Copula Models

Contents:

Author Info

  • Zhao, Jieyuan
  • Goodwin, Barry K.

Abstract

In this study, we propose a new approach to estimating optimal dynamic cross-hedge ratios. In particular, we apply copula models to discuss the use of corn futures contracts to cross hedge grain sorghum, and the use of Kansas wheat futures contracts to cross hedge barley. Hedge (or cross-hedge) ratios are generally estimated by using the variances of cash and futures returns and the correlation between these returns. We compute the time-varying variances of cash and futures returns by applying the Error Correction Model (ECM) with GARCH error terms. The time-varying correlation term in the dynamic cross-hedge ratio is obtained from eight copula models – two elliptical copulas (Gaussian and Student’s-t) and six Archimedean copulas (Clayton, rotated Clayton, Gumbel, rotated Gumbel, Frank, and Plackett). We use maximum likelihood estimation techniques to estimate the copula models and compare the performance of these copula models by their maximum likelihood values. Results confirm the significant linkages between these markets and demonstrate the effectiveness of cross-hedging as a mechanism for managing price risks.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://purl.umn.edu/124610
Download Restriction: no

Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124610.

as in new window
Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:ags:aaea12:124610

Contact details of provider:
Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202
Phone: (414) 918-3190
Fax: (414) 276-3349
Email:
Web page: http://www.aaea.org
More information through EDIRC

Related research

Keywords: cross-hedging; cross-hedge ratio; copula; Risk and Uncertainty;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Blake, Martin L. & Catlett, Lowell B., 1984. "Cross Hedging Hay Using Corn Futures: An Empirical Test," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 9(01), July.
  2. Franken, Jason R.V. & Parcell, Joseph L., 2003. "Cash Ethanol Cross-Hedging Opportunities," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 35(03), December.
  3. Chang, Eric C. & Wong, Kit Pong, 2003. "Cross-Hedging with Currency Options and Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(03), pages 555-574, September.
  4. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-96, December.
  5. 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 623-30, November.
  6. 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.
  7. Kit Pong Wong, 2007. "Optimal Export And Hedging Decisions When Forward Markets Are Incomplete," Bulletin of Economic Research, Wiley Blackwell, vol. 59(1), pages 67-81, 01.
  8. 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(04), pages 535-551, December.
  9. 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.
  10. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March.
  11. Hayenga, Marvin L. & DiPietre, Dennis D., 1982. "Cross-Hedging Wholesale Pork Products Using Live Hog Futures," Staff General Research Papers 11305, Iowa State University, Department of Economics.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ags:aaea12:124610. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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