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

  • Wu, Feng
  • Guan, Zhengfei
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    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.

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    File URL: http://purl.umn.edu/49453
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    Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 49453.

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    Date of creation: Apr 2009
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    Handle: RePEc:ags:aaea09:49453
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    1. 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.
    2. Baele, L., 2003. "Volatility Spillover Effects in European Equity Markets," Discussion Paper 2003-114, Tilburg University, Center for Economic Research.
    3. 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.
    4. 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 116-31, February.
    5. Geert Bekaert & Campbell R. Harvey, 1995. "Emerging Equity Market Volatility," NBER Working Papers 5307, National Bureau of Economic Research, Inc.
    6. Gordon, J. Douglas, 1985. "The Distribution of Daily Changes in Commodity Futures Prices," Technical Bulletins 156817, United States Department of Agriculture, Economic Research Service.
    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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