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Hedging with Chinese metal futures

  • Lien, Donald
  • Yang, Li
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This paper evaluates different hedging strategies for aluminum and copper futures contracts traded at Shanghai Futures Exchange. In addition to usual candidates such as the traditional regression hedge ratio and the hedging strategy constructed from bivariate fractionally integrated generalized autoregressive conditional heteroskedasticity (BFIGARCH) model, two advanced specifications are proposed to account for impacts of the basis on market volatility and co-movements between spot and futures returns. Empirical results suggest that the basis has asymmetric effects and optimal hedging strategy constructed from the asymmetric BFIGARCH model tends to produce the best in-sample and out-of-sample hedging performance.

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Article provided by Elsevier in its journal Global Finance Journal.

Volume (Year): 19 (2008)
Issue (Month): 2 ()
Pages: 123-138

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Handle: RePEc:eee:glofin:v:19:y:2008:i:2:p:123-138
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620162

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  1. Brunetti, Celso & Gilbert, Christopher L., 2000. "Bivariate FIGARCH and fractional cointegration," Journal of Empirical Finance, Elsevier, vol. 7(5), pages 509-530, December.
  2. Zhong, Maosen & Darrat, Ali F. & Otero, Rafael, 2004. "Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3037-3054, December.
  3. 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.
  4. Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-93, December.
  5. Ng, Victor K & Pirrong, Stephen Craig, 1994. "Fundamentals and Volatility: Storage, Spreads, and the Dynamics of Metals Prices," The Journal of Business, University of Chicago Press, vol. 67(2), pages 203-30, April.
  6. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
  7. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  8. Cheung, Yin-Wong, 1993. "Long Memory in Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 93-101, January.
  9. 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.
  10. Lien, Donald & Yang, Li, 2008. "Asymmetric effect of basis on dynamic futures hedging: Empirical evidence from commodity markets," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 187-198, February.
  11. MARTINOT, N. & Lesourd, J.-B. & Morard, B., 2000. "On the Information Content of Futures Prices, Application to LME Nonferrous Metal Futures," Papers 2000.12, Ecole des Hautes Etudes Commerciales, Universite de Geneve-.
  12. Clinton Watkins & Michael McAleer, 2004. "Econometric modelling of non-ferrous metal prices," Journal of Economic Surveys, Wiley Blackwell, vol. 18(5), pages 651-701, December.
  13. Chris Brooks & Olan T. Henry & Gita Persand, 2002. "The Effect of Asymmetries on Optimal Hedge Ratios," The Journal of Business, University of Chicago Press, vol. 75(2), pages 333-352, April.
  14. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-76, April.
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