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The Economic Value of Minimum-Variance Hedges

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  • Lence, Sergio H.

Abstract

The present article examines the potential economic gains from "better" minimum-variance hedge (MVH) estimates, focusing on the assumptions that yield MVHs consistent with expected-utility maximization. It is found that the economic value of "better" MVH estimates is negligible, and that optimal hedges are substantially different from MVHs when the usual MVH restrictions are relaxed. Among other things, findings suggest that the hedging research's recent emphasis on "better" MVHs has been a waste of resources. Investigating the consequences of relaxing the standard MVH assumptions seems to be much more important than recent literature contributions.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 5053.

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Date of creation: 01 May 1995
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Publication status: Published in American Journal of Agricultural Economics, May 1995, vol. 77 no. 2, pp. 353-364
Handle: RePEc:isu:genres:5053

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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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Cited by:
  1. Garcia, Philip & Nelson, Carl H., 2003. "Engaging Students In Research: The Use Of Structured Professional Dialogue," 2003 Annual meeting, July 27-30, Montreal, Canada 21894, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. Frechette, Darren L., 2000. "Hedging With Futures And Options: A Demand Systems Approach," 2000 Conference, April 17-18 2000, Chicago, Illinois 18941, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  3. Cifarelli, Giulio & Paladino, Giovanna, 2011. "Hedging vs. speculative pressures on commodity futures returns," MPRA Paper 28229, University Library of Munich, Germany.
  4. Fu, Junhui & Zhang, Wei-Guo & Yao, Zheng & Zhang, Xili, 2012. "Hedging the portfolio of raw materials and the commodity under the mark-to-market risk," Economic Modelling, Elsevier, vol. 29(4), pages 1070-1075.
  5. Chen, Sheng-Syan & Lee, Cheng-few & Shrestha, Keshab, 2003. "Futures hedge ratios: a review," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 433-465.
  6. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  7. Mattos, Fabio & Garcia, Philip & Nelson, Carl, 2008. "Relaxing standard hedging assumptions in the presence of downside risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(1), pages 78-93, February.
  8. Tonsor, Glynn T., 2008. "Hedging in Presence of Market Access Risk," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37621, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  9. Lence, Sergio H., 1996. "Relaxing The Assumptions Of Minimum-Variance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(01), July.
  10. Lee, Sang-Hak & Yang, Seung-Ryong, 2000. "The Minimum Semi-Variance Hedge For Food Manufacturers In Korea," 2000 Annual meeting, July 30-August 2, Tampa, FL 21867, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  11. Jin, Hyun J. & Koo, Won W., 2006. "Offshore hedging strategy of Japan-based wheat traders under multiple sources of risk and hedging costs," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 220-236, March.
  12. Su, EnDer, 2013. "Stock index hedge using trend and volatility regime switch model considering hedging cost," MPRA Paper 49190, University Library of Munich, Germany.
  13. Ahmedov, Zafarbek & Woodard, Joshua D., 2012. "Do RIN Mandates and Blender's Tax Credit Affect Blenders' Hedging Strategies?," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124980, Agricultural and Applied Economics Association.
  14. Frechette, Darren L. & Tuthill, Jonathan W., 2000. "Weighted Expected Utility Hedge Ratios," 2000 Conference, April 17-18 2000, Chicago, Illinois 18931, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  15. 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).

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