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Short-run derivations and time-varying hedge ratios: evidence from agricultural futures markets

Record type: Monograph (Working Paper)

This paper investigates the hedging effectiveness of time-varying hedge ratios in the agricultural commodities
futures markets based on four different versions of the GARCH models. The GARCH models applied are the
standard bivariate GARCH, the bivariate BEKK GARCH, the bivariate GARCH-X and the bivariate BEKK
GARCH-X. The GARCH-X and the BEKK GARCH-X models are uniquely different from the other two
models because they take into consideration the effect of the short-run deviations from the long-run relationship
between the cash and futures prices on the second conditional moments of the bivariate distribution of the
variable. For comparison, a constant minimum variance hedge ratio estimated by means of OLS is also applied.
Futures data for corn, coffee, wheat, sugar and soybean are applied. Comparison of the hedging effectiveness is
done for the within sample period (1980-2004), and two out-of-sample periods (2002-2004 and 2003-2004)
performance. Results indicate superior performance of the portfolios based on the GARCH-X model estimated
hedge ratio during most periods.

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Citation

Choudhry, Taufiq (2007) Short-run derivations and time-varying hedge ratios: evidence from agricultural futures markets , Southampton, UK University of Southampton 41pp. (Management Working Papers, M-07-08).

More information

Published date: 2007
Keywords: hedge ratio, garch, bekk garch, garch-x, bekk garch-x and minimum variance

Identifiers

Local EPrints ID: 51664
URI: http://eprints.soton.ac.uk/id/eprint/51664
ISSN: 1356-3548
PURE UUID: f8ff90d5-c4fe-4b7e-aeaa-b197196b686c

Catalogue record

Date deposited: 05 Jun 2008
Last modified: 17 Jul 2017 14:48

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