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Testing for Constant Hedge Ratios in Commodity Markets: A Multivariate Garch Approach

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  • Moschini, GianCarlo
  • Myers, Robert J.

Abstract

The authors develop a new multivariate GARCH parameterization that is suitable for testing the hypothesis that the optimal futures hedge ratio is constant over time, given that the joint distribution of cash and futures prices is characterized by autoregressive conditional heteroskedasticity. The advantage of the new parameterization is that it allows for a flexible form of time-varying volatility, even under the null of a constant hedge ratio. The model is estimated using weekly corn prices. Statistical tests reject the null hypothesis of a constant hedge ratio and also reject the null that time variation in optimal hedge ratios can be explained solely by deterministic seasonality and time-to-maturity effects.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 1945.

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Date of creation: 01 Dec 2002
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Publication status: Published in Journal of Empirical Finance, December 2002, vol. 9 no. 5, pp. 589-603
Handle: RePEc:isu:genres:1945

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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  1. repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
  2. Moschini, GianCarlo & Hennessy, David A., 2001. "Uncertainty, Risk Aversion, and Risk Management for Agricultural Producers," Staff General Research Papers, Iowa State University, Department of Economics 5323, Iowa State University, Department of Economics.
  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., John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun.
  4. Lence, Sergio H., 1995. "On the Optimal Hedge Under Unbiased Futures Prices," Staff General Research Papers, Iowa State University, Department of Economics 5115, Iowa State University, Department of Economics.
  5. Benninga, Simon & Eldor, Rafael & Zilcha, Itzhak, 1983. "Optimal hedging in the futures market under price uncertainty," Economics Letters, Elsevier, Elsevier, vol. 13(2-3), pages 141-145.
  6. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  7. Stephen G. Cecchetti & Robert E. Cumby & Stephen Figlewski, 1986. "Estimation of the optimal futures hedge," Research Working Paper, Federal Reserve Bank of Kansas City 86-10, Federal Reserve Bank of Kansas City.
  8. Karp, Larry, 1985. "Dynamic Hedging with Uncertain Production," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt20k8j5kh, Department of Agricultural & Resource Economics, UC Berkeley.
  9. Moschini, GianCarlo & Lapan, Harvey E., 1995. "Hedging Role of Options and Futures Under Joint Price, Basis and Production Risk, The," Staff General Research Papers, Iowa State University, Department of Economics 5137, Iowa State University, Department of Economics.
  10. Lumsdaine, Robin L, 1996. "Consistency and Asymptotic Normality of the Quasi-maximum Likelihood Estimator in IGARCH(1,1) and Covariance Stationary GARCH(1,1) Models," Econometrica, Econometric Society, Econometric Society, vol. 64(3), pages 575-96, May.
  11. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(01), pages 122-150, February.
  12. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  13. 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, Cambridge University Press, vol. 28(04), pages 535-551, December.
  14. Phillips, P C B, 1991. "Optimal Inference in Cointegrated Systems," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 283-306, March.
  15. Moschini, Giancarlo & Lapan, Harvey, 1995. "The Hedging Role of Options and Futures under Joint Price, Basis, and Production Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 1025-49, November.
  16. Lapan, Harvey E. & Moschini, GianCarlo & Hanson, Steven D., 1991. "Production Hedging and Speculative Decisions with Options and Future Markets," Staff General Research Papers, Iowa State University, Department of Economics 10810, Iowa State University, Department of Economics.
  17. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 113-44, January.
  18. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "The Time Pattern of Hedging and the Volatility of Futures Prices," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(2), pages 249-66, April.
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