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Asset storability and hedging effectiveness in commodity futures markets

  • Jian Yang
  • Titus Awokuse

This paper examines risk minimization hedging effectiveness for major storable and nonstorable agricultural commodity futures markets. Based on the error correction model - bivariate GARCH frameworks, some evidence is found that the hedging effectiveness is stronger for storable commodities than nonstorable commodities under consideration. The finding illustrates an important difference between storable and nonstorable commodities with regard to their hedging function.

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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 10 (2003)
Issue (Month): 8 ()
Pages: 487-491

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Handle: RePEc:taf:apeclt:v:10:y:2003:i:8:p:487-491
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  1. Peck, Anne E, 1976. "Futures Markets, Supply Response, and Price Stability," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 407-23, August.
  2. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun.
  3. Fleming, Jeff & Kirby, Chris & Ostdiek, Barbara, 1998. "Information and volatility linkages in the stock, bond, and money markets," Journal of Financial Economics, Elsevier, vol. 49(1), pages 111-137, July.
  4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  5. Michael S. Haigh & Matthew T. Holt, 2000. "Hedging Multiple Price Uncertainty in International Grain Trade," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 881-896.
  6. Anil K. Bera & Philip Garcia & Jae-Sun Roh, 1997. "Estimation of Time-Varying Hedge Ratios for Corn and Soybeans: BGARCH and Random Coefficient Approaches," Finance 9712007, EconWPA.
  7. Seung‐Ryong Yang & B. Wade Brorsen, 1993. "Nonlinear dynamics of daily futures prices: Conditional heteroskedasticity or chaos?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(2), pages 175-191, 04.
  8. Peter S. Sephton, 1993. "Optimal Hedge Ratios at the Winnipeg Commodity Exchange," Canadian Journal of Economics, Canadian Economics Association, vol. 26(1), pages 175-93, February.
  9. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  10. Darbar, Salim M & Deb, Partha, 1997. "Co-movements in International Equity Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(3), pages 305-22, Fall.
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