Title

Testing for constant hedge ratios in commodity markets: a multivariate GARCH approach

Campus Units

Economics, Center for Agricultural and Rural Development

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

12-2002

Journal or Book Title

Journal of Empirical Finance

Volume

9

Issue

5

First Page or Article ID Number

589

Last Page

603

DOI

10.1016/S0927-5398(02)00012-9

Abstract

We develop a new multivariate generalized ARCH (GARCH) parameterization suitable for testing the hypothesis that the optimal futures hedge ratio is constant over time, given that the joint distribution of cash and futures prices is characterized by autoregressive conditional heteroskedasticity (ARCH). The advantage of the new parameterization is that it allows for a flexible form of time-varying volatility, even under the null of a constant hedge ratio. The model is estimated using weekly corn prices. Statistical tests reject the null hypothesis of a constant hedge ratio and also reject the null that time variation in optimal hedge ratios can be explained solely by deterministic seasonality and time to maturity effects.

JEL Classification

C52, Q14

Comments

This is a working paper of an article from Journal of Empirical Finance 9 (2002): 589, doi: 10.1016/S0927-5398(02)00012-9.