Short-run deviations and time-varying hedge ratios: Evidence from agricultural futures markets Choudhry, Taufiq

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Choudhry, Taufiq
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International Review of Financial Analysis
Commodity futures; hg finance; ha statistics
To link to full-text access for this article, visit this link: Byline: Taufiq Choudhry Keywords: Hedge ratio; GARCH; BEKK GARCH; GARCH-X; BEKK GARCH-X and variance Abstract: This paper investigates the hedging effectiveness of time-varying hedge ratios in the agricultural commodities futures markets using 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. Futures data for corn, coffee, wheat, sugar, soybeans, live cattle and hogs 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). Results indicate superior performance of the portfolios based on the GARCH-X model estimated hedge ratio during all periods. Author Affiliation: School of Management, University of Southampton, Highfield, Southampton SO17 1BJ, UK Article History: Received 28 March 2007; Revised 17 July 2008; Accepted 21 November 2008 Article Note: (footnote) [star] The author thanks two anonymous referees and the editor for several useful comments and suggestions. The author also thanks the participants of the European Financial Management Association conference 2006 Madrid, Spain for valuable comments and suggestions on an earlier draft of the paper. Any remaining errors and omissions are the author's responsibility alone.
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