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Effectiveness of hedging within the high price volatility context

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  • Revoredo-Giha, Cesar
  • Zuppiroli, Marco

Abstract

The instability of prices and the hypothesis that speculative behaviour was one of its sources has brought renewed interest in the futures markets. In this paper, we concentrate on the European wheat futures markets (feed and milling) and the CBOT’s wheat contract as a comparison. The purpose of the paper is to study whether those markets still allow substitution price risk for basis risk. This implicitly is a test of whether the increasing presence of speculation in futures market have made them divorced from the physical markets, and therefore, not useful for commercial entities. We study two aspects: efficiency and hedging effectiveness and our results indicate that there are still a good connection between physical and futures markets, and therefore, hedging can still play an important role protecting commodity handlers against price volatility.

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Bibliographic Info

Paper provided by Scotland's Rural College (formerly Scottish Agricultural College), Land Economy & Environment Research Group in its series Working Papers with number 142546.

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Date of creation: Sep 2012
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Handle: RePEc:ags:srlewp:142546

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Web page: http://www.sruc.ac.uk/info/120037/land_economy_and_environment
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Keywords: Futures prices; commodity prices; volatility; wheat; Agribusiness; Agricultural and Food Policy; Crop Production/Industries; Demand and Price Analysis; Financial Economics; Risk and Uncertainty;

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  1. Castelino, Mark G, 1989. "Basis Volatility: Implications for Hedging," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, Southern Finance Association;Southwestern Finance Association, vol. 12(2), pages 157-72, Summer.
  2. Sanders, Dwight R. & Manfredo, Mark R., 2004. "Comparing Hedging Effectiveness: An Application of the Encompassing Principle," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 29(01), April.
  3. Irwin, Scott H. & Sanders, Dwight R. & Merrin, Robert P., 2009. "Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, Southern Agricultural Economics Association, vol. 41(02), August.
  4. Roger W. Gray, 1961. "The Search for a Risk Premium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 250.
  5. Lien, Donald, 2005. "The use and abuse of the hedging effectiveness measure," International Review of Financial Analysis, Elsevier, Elsevier, vol. 14(2), pages 277-282.
  6. Lence, Sergio H., 2008. "Do Futures Benefit Farmers?," Staff General Research Papers, Iowa State University, Department of Economics 12919, Iowa State University, Department of Economics.
  7. Lien, Donald & Tse, Y K, 2002. " Some Recent Developments in Futures Hedging," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(3), pages 357-96, July.
  8. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, American Finance Association, vol. 25(2), pages 383-417, May.
  9. STEVEN C. BLANK & COLIN A. CARTER & JEFFREY McDONALD, 1997. "Is The Market Failing Agricultural Producers Who Wish To Manage Risks?," Contemporary Economic Policy, Western Economic Association International, Western Economic Association International, vol. 15(3), pages 103-112, 07.
  10. Paul H. Cootner, 1960. "Returns to Speculators: Telser versus Keynes," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 68, pages 396.
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