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The Volatility Spillover Effects and Optimal Hedging Strategy in the Corn Market

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  • Wu, Feng
  • Guan, Zhengfei

Abstract

This article examines the volatility spillovers from energy market to corn market. Using a volatility spillover model from the finance literature, we found significant spillovers from energy market to corn cash and futures markets, and the spillover effects are time-varying. The business cycle proxied by crude oil prices is shown to affect the magnitude of spillover effects over time. Based on the strong informational linkage between energy market and corn market, a cross hedge strategy is proposed and its performance studied. The simulation outcomes show that compared to alternative strategies of no hedge, constant hedge, and GARCH hedge, the cross hedge does not yield superior risk-reduction performance.

Suggested Citation

  • Wu, Feng & Guan, Zhengfei, 2009. "The Volatility Spillover Effects and Optimal Hedging Strategy in the Corn Market," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49453, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea09:49453
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    File URL: http://purl.umn.edu/49453
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    References listed on IDEAS

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    1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    2. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
    3. Gordon, J. Douglas, 1985. "The Distribution of Daily Changes in Commodity Futures Prices," Technical Bulletins 156817, United States Department of Agriculture, Economic Research Service.
    4. Baele, Lieven, 2005. "Volatility Spillover Effects in European Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 373-401, June.
    5. Michael S. Haigh & Matthew T. Holt, 2002. "Crack spread hedging: accounting for time-varying volatility spillovers in the energy futures markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(3), pages 269-289.
    6. 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.
    7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    Cited by:

    1. Mallory, Mindy L. & Irwin, Scott H. & Hayes, Dermot J., 2012. "How market efficiency and the theory of storage link corn and ethanol markets," Energy Economics, Elsevier, vol. 34(6), pages 2157-2166.
    2. Mallory, Mindy L. & Irwin, Scott H. & Hayes, Dermot J., 2012. "How Market Efficiency and the Theory of Storage Link Corn and Ethanol Markets Energy Economics," ISU General Staff Papers 201211010700001537, Iowa State University, Department of Economics.

    More about this item

    Keywords

    Volatility Spillover; GARCH; Optimal Hedge Ratio; Energy Price; Corn Price; Risk and Uncertainty;

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