Volatility Spillovers Between Foreign Exchange, Commodity And Freight Futures Prices: Implications For Hedging Strategies
AbstractIn many studies the assumption is made that traders only encounter one type of price risk. In reality, however, traders are exposed to multiple price risks, and often have several relevant derivative instruments available with which to hedge price uncertainty. In this study, commodity, foreign exchange, and freight futures contracts are analyzed for their effectiveness in reducing price uncertainty for international grain traders. A theoretical model is developed for a representative European importer to depict a realistic trading problem encountered by an international grain trading corporation exposed to more than one type of price risk. The traditional method of estimating hedge ratios by Ordinary Least Squares (OLS) is compared to the Seemingly Unrelated Regression (SUR) and the multivariate GARCH (MGARCH) methodology, which takes into account time-varying variances and covariances between the cash and futures markets. Explicit modeling of the time-variation in futures hedge ratios via the MGARCH methodology, using all derivatives and taking into account dependencies between markets results in a significant reduction in price risk for grain traders. The results also confirm that the unique, but underutilized, freight futures market is a potentially useful mechanism for reducing price uncertainty for international grain traders. The research undertaken in this study provides valuable information about reducing price uncertainty for international grain traders and gives a better understanding of the linkages between closely related markets.
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Bibliographic InfoPaper provided by Texas A&M University, Department of Agricultural Economics in its series Faculty Paper Series with number 23997.
Date of creation: 1999
Date of revision:
hedging; multivariate GARCH; foreign exchange; freight and commodity futures; Marketing; F3; C3; G1;
Other versions of this item:
- Haigh, Michael S. & Holt, Matthew T., 1999. "Volatility Spillovers Between Foreign Exchange, Commodity And Freight Futures Prices: Implications For Hedging Strategies," 1999 Annual meeting, August 8-11, Nashville, TN 21625, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- F3 - International Economics - - International Finance
- C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
- G1 - Financial Economics - - General Financial Markets
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