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On the Pitfalls of Multi-Year Rollover Hedges: The Case of Hedge-To-Arrive Contracts

Author

Listed:
  • Lence, Sergio H.
  • Hayenga, Marvin L.

Abstract

It is shown that it is theoretically infeasible for multi-year rollover hedge-to-arrive contracts, and for rollover hedges in general, to succeed at locking in high current prices for crops to be harvested one or more years into the future. The study utilizes 107 years of data to present strong empirical evidence that the corn market behaves remarkably similarly to what price theory predicts. Results also confirm that short historical time series are unreliable for predicting rare events. Hence, empirical studies of risk-management contracts capitalizing on unusual occurrences should use samples sufficiently large to contain a meaningful number of relevant observations.

Suggested Citation

  • Lence, Sergio H. & Hayenga, Marvin L., 2001. "On the Pitfalls of Multi-Year Rollover Hedges: The Case of Hedge-To-Arrive Contracts," Staff General Research Papers Archive 1965, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:1965
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    Cited by:

    1. Yoon, Byung-Sam & Brorsen, B. Wade, 2005. "Can Multiyear Rollover Hedging Increase Mean Returns?," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 37(01), pages 65-78, April.
    2. World Bank, 2005. "Managing Food Price Risks and Instability in an Environment of Market Liberalization," World Bank Other Operational Studies 8264, The World Bank.
    3. Na Jin & Sergio Lence & Chad Hart & Dermot Hayes, 2012. "The Long-Term Structure of Commodity Futures," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(3), pages 718-735.
    4. Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao Gomes & Batts, Ryan M., 2006. "The Pricing Performance of Market Advisory Services in Corn and Soybeans Over 1995-2004," AgMAS Project Research Reports 37513, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    5. Hikaru Hanawa Peterson & William G. Tomek, 2005. "How much of commodity price behavior can a rational expectations storage model explain?," Agricultural Economics, International Association of Agricultural Economists, vol. 33(3), pages 289-303, November.
    6. Irwin, Scott H. & Martines-Filho, Joao Gomes & Good, Darrel L., 2003. "The Pricing Performance of Market Advisory Services in Corn and Soybeans Over 1995-2001," AgMAS Project Research Reports 37510, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    7. Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income-Enhancing And Risk-Reducing Properties Of Marketing Practices," 2001 Annual meeting, August 5-8, Chicago, IL 20613, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income Enhancing and Risk Management Properties of Marketing Practices," Working Papers 127653, Cornell University, Department of Applied Economics and Management.
    9. Good, Darrel L. & Martines-Filho, Joao Gomes & Irwin, Scott H., 2002. "The Pricing Performance Of Market Advisory Services In Corn And Soybeans Over 1995-2000," AgMAS Project Research Reports 14784, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    10. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao Gomes & Hagedorn, Lewis A., 2005. "The Pricing Performance of Market Advisory Services in Corn and Soybeans over 1995-2003," AgMAS Project Research Reports 14775, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.

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