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

摘要

This paper investigates the hedging effectiveness of time-varying hedge ratios in the agricultural commoditiesfutures markets based on four different versions of the GARCH models. The GARCH models applied are thestandard bivariate GARCH, the bivariate BEKK GARCH, the bivariate GARCH-X and the bivariate BEKKGARCH-X. The GARCH-X and the BEKK GARCH-X models are uniquely different from the other twomodels because they take into consideration the effect of the short-run deviations from the long-run relationshipbetween the cash and futures prices on the second conditional moments of the bivariate distribution of thevariable. 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 isdone 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 estimatedhedge ratio during most periods.