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Lookup NU author(s): Dr Philip Dawson, Dr Abigail Tiffin, Dr Benedict White
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Over 100, 000 futures contracts for cereals are traded annually on the London International Financial Futures Exchange. The proportion of the spot position held as futures contracts the hedging ratio - is critical to traders and traditional estimates, using OLS, are constant over time. In this paper; we estimate time-varying hedging ratios for wheat and barley contracts using a multivariate generalised autoregressive conditional heteroscedasticity (GARCH) model. Results indicate that GARCH hedging ratios do change through time. Moreover; risk using the GARCH hedge is reduced significantly by around 4 per cent for wheat and 2 per cent for barley relative to the no hedge position, and significantly by around 0.2 per cent relative to the constant hedge. The optimal, expected utility-maximising, and the risk-minimising hedging ratios are equivalent.
Author(s): White B; Tiffin AL; Dawson PJ
Publication type: Article
Publication status: Published
Journal: Journal of Agricultural Economics
Year: 2000
Volume: 51
Issue: 2
Pages: 147-161
ISSN (print): 021-857X
ISSN (electronic): 1477-9552
Publisher: Wiley-Blackwell Publishing Ltd.
URL: http://dx.doi.org/10.1111/j.1477-9552.2000.tb01220.x
DOI: 10.1111/j.1477-9552.2000.tb01220.x
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