Effectiveness of hedging within the high price volatility context
The instability of prices and the hypothesis that speculative behaviour was one of its sources has brought renewed interest in the futures markets. In this paper, we concentrate on the European wheat futures markets (feed and milling) and the CBOT’s wheat contract as a comparison. The purpose of the paper is to study whether those markets still allow substitution price risk for basis risk. This implicitly is a test of whether the increasing presence of speculation in futures market have made them divorced from the physical markets, and therefore, not useful for commercial entities. We study two aspects: efficiency and hedging effectiveness and our results indicate that there are still a good connection between physical and futures markets, and therefore, hedging can still play an important role protecting commodity handlers against price volatility.
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- Castelino, Mark G, 1989. "Basis Volatility: Implications for Hedging," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(2), pages 157-72, Summer.
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- Lien, Donald & Tse, Y K, 2002. " Some Recent Developments in Futures Hedging," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 357-96, July.
- Irwin, Scott H. & Sanders, Dwight R. & Merrin, Robert P., 2009. "Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 41(02), pages 377-391, August.
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- Irwin, Scott H. & Sanders, Dwight R. & Merrin, Robert P., 2009. "Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(02), August.
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