Multi Mean Garch Approach to Evaluating Hedging Performance in the Crude Palm Oil Futures Market
This paper provides evidence of hedging performance in the crude palm oil market using risk minimisation and the investor's utility function measurement. We use the spot and futures crude palm oil daily prices from the period of January 1996 to August 2008. Using a dynamic model, we estimate three different mean specifications that involve the intercept, Vector Autoregressive (VAR) and Vector Error Correction Model (VECM) within the Baba, Engle, Kraft and Kroner (BEKK) model. The risk minimisation results exhibit that the Intercept-BEKK and VAR-BEKK models tend to give the most variance reduction within the in-sample and out-sample analysis, respectively. However, Intercept-BEKK remains to outcast the other models in giving the most utility function. The empirical evidence shows that different mean specifications will generate varying hedging performance results, especially in relation to the risk minimisation result. However, the difference in the performance among the tested models is small, especially within the investor's utility function measurement. Since a more sophisticated model does not warrant better hedging performance results, we suggest that a parsimony model may be appropriate when improvising the hedging performance.
Volume (Year): 7 (2011)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://web.usm.my/aamj/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988.
"Estimation of the Optimal Futures Hedge,"
The Review of Economics and Statistics,
MIT Press, vol. 70(4), pages 623-30, November.
- Wilkinson, Katherine J & Rose, Lawrence C & Young, Martin R, 1999. "Comparing the Effectiveness of Traditional and Time Varying Hedge Ratios Using New Zealand and Australian Debt Futures Contracts," The Financial Review, Eastern Finance Association, vol. 34(3), pages 79-94, August.
- Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
- 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 109-124, April-Jun.
- Gagnon, Louis & Lypny, Gregory J. & McCurdy, Thomas H., 1998. "Hedging foreign currency portfolios," Journal of Empirical Finance, Elsevier, vol. 5(3), pages 197-220, September.
- Hsiang-Tai Lee & Jonathan Yoder, 2005.
"A Bivariate Markov Regime Switching GARCH Approach to Estimate Time Varying Minimum Variance Hedge Ratios,"
- Hsiang-Tai Lee & Jonathan Yoder, 2007. "A bivariate Markov regime switching GARCH approach to estimate time varying minimum variance hedge ratios," Applied Economics, Taylor & Francis Journals, vol. 39(10), pages 1253-1265.
- Lien, Donald, 2004. "Cointegration and the optimal hedge ratio: the general case," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(5), pages 654-658, December.
- Donald Lien & Y. K. Tse & Albert Tsui, 2002. "Evaluating the hedging performance of the constant-correlation GARCH model," Applied Financial Economics, Taylor & Francis Journals, vol. 12(11), pages 791-798.
- 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.
- Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
- Lorne N. Switzer & Mario El‐Khoury, 2007. "Extreme volatility, speculative efficiency, and the hedging effectiveness of the oil futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(1), pages 61-84, 01.
- 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.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Wenling Yang & David E. Allen, 2005. "Multivariate GARCH hedge ratios and hedging effectiveness in Australian futures markets," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(2), pages 301-321.
- Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
- F. Douglas Foster & Charles H. Whiteman, 2002. "Bayesian Cross Hedging: An Example From the Soybean Market," Australian Journal of Management, Australian School of Business, vol. 27(2), pages 95-122, December.
- Christos Floros & Dimitrios Vougas, 2004. "Hedge ratios in Greek stock index futures market," Applied Financial Economics, Taylor & Francis Journals, vol. 14(15), pages 1125-1136.
- Ederington, Louis H. & Salas, Jesus M., 2008. "Minimum variance hedging when spot price changes are partially predictable," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 654-663, May.
When requesting a correction, please mention this item's handle: RePEc:usm:journl:aamjaf00701_111-130. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journal Division, Penerbit Universiti Sains Malaysia)
If references are entirely missing, you can add them using this form.