Estimating time-varying optimal hedge ratios on futures markets

1991 ◽  
Vol 11 (1) ◽  
pp. 39-53 ◽  
Author(s):  
Robert J. Myers
Keyword(s):  
Futures Markets ◽  
Time Varying ◽  
Hedge Ratios ◽  
Optimal Hedge

Does hedging in futures market benefit Indian farmers?

2014 ◽  
Vol 31 (3) ◽  
pp. 291-308
Author(s):  
Thiagu Ranganathan ◽  
Usha Ananthakumar
Keyword(s):  
Risk Aversion ◽  
Futures Markets ◽  
Price Expectations ◽  
Content Type ◽  
Indian Context ◽  
Hedge Ratios ◽  
Yield Risk ◽  
Potential Benefits ◽  
Trading Volumes ◽  
Optimal Hedge

Purpose – The purpose of this paper is to perform an analysis of potential benefits from usage of the futures markets for the farmers. The national commodity exchanges were established in India in the year 2003-2004. Though there has been a spectacular growth in trading volumes in these exchanges, participation of farmers in these markets has been very low. Efforts are being made to increase the awareness and participation of farmers in these markets. As such efforts are being made, it is critical to analyse the potential benefits from usage of the futures markets for the farmers. Our study performs such an analysis for soybean farmers in the Dewas district of Madhya Pradesh state in India. Design/methodology/approach – The authors estimate the optimal hedge ratios in futures markets for farmers in different scenarios characterised by varying levels of different parameters relevant to the farmer. For these optimal hedge ratios, we then estimate the benefits from hedging defined as the change in certainty equivalent income (CEI) due to hedging. Findings – Results indicate that the CEI gain due to hedging is positively related to the farmer’s risk aversion and inversely related to farmer’s price expectations and transaction costs. Also, only when the risk aversion is high, the CEI gain is positively related to the natural hedge. Thus, for a farmer with high risk aversion, hedging acts as a substitute to the natural hedge. Originality/value – This is the first study that analyses the hedging for farmer in the Indian context by considering yield risk while doing so. Also, their study establishes a relationship between risk aversion, the natural hedge and benefits from hedging in futures markets for the farmer.

Hedging and Optimal Hedge Ratios for International Index Futures Markets

2009 ◽  
Vol 12 (04) ◽  
pp. 593-610 ◽  
Author(s):  
Cheng-Few Lee ◽  
Kehluh Wang ◽  
Yan Long Chen
Keyword(s):  
Futures Markets ◽  
Minimum Variance ◽  
Stock Index ◽  
Stock Index Futures ◽  
Hedge Ratio ◽  
Index Futures ◽  
Static Hedging ◽  
Hedge Ratios ◽  
Optimal Hedge ◽  
Mean Variance

This empirical study utilizes four static hedging models (OLS Minimum Variance Hedge Ratio, Mean-Variance Hedge Ratio, Sharpe Hedge Ratio, and MEG Hedge Ratio) and one dynamic hedging model (bivariate GARCH Minimum Variance Hedge Ratio) to find the optimal hedge ratios for Taiwan Stock Index Futures, S&P 500 Stock Index Futures, Nikkei 225 Stock Index Futures, Hang Seng Index Futures, Singapore Straits Times Index Futures, and Korean KOSPI 200 Index Futures. The effectiveness of these ratios is also evaluated. The results indicate that the methods of conducting optimal hedging in different markets are not identical. However, the empirical results confirm that stock index futures are effective direct hedging instruments, regardless of hedging schemes or hedging horizons.

scholarly journals Determining the effectiveness of optimal time-varying hedge ratios for cattle feeders under multiproduct and single commodity settings

2014 ◽  
Vol 74 (2) ◽  
pp. 217-235
Author(s):  
Hernan Tejeda ◽  
Dillon Feuz
Keyword(s):  
Risk Mitigation ◽  
Estimation Methods ◽  
Time Varying ◽  
Content Type ◽  
Single Time ◽  
Feeder Cattle ◽  
Dynamic Correlations ◽  
Hedge Ratios ◽  
Optimal Hedge ◽  
Single Commodity

Purpose – The purpose of this paper is to determine and contrast the risk mitigating effectiveness from optimal multiproduct time-varying hedge ratios, applied to the margin of a cattle feedlot operation, over single commodity time-varying and naive hedge ratios. Design/methodology/approach – A parsimonious regime-switching dynamic correlations (RSDC) model is estimated in two-stages, where the dynamic correlations among prices of numerous commodities vary proportionally between two different regimes/levels. This property simplifies estimation methods for a large number of parameters involved. Findings – There is significant evidence that resulting simultaneous correlations among the prices (spot and futures) for each commodity attain different levels along the time-series. Second, for in and out-of-sample data there is a substantial reduction in the operation's margin variance provided from both multiproduct and single time-varying optimal hedge ratios over naive hedge ratios. Lastly, risk mitigation is attained at a lower cost given that average optimal multiproduct and single time-varying hedge ratios obtained for corn, feeder cattle and live cattle are significantly below the naive full hedge ratio. Research limitations/implications – The application studied is limited in that once a hedge position has been set at a particular period, it is not possible to modify or update at a subsequent period. Practical implications – Agricultural producers, specifically cattle feeders, may profit from a tool using improved techniques to determine hedge ratios by considering a larger amount of up-to-date information. Moreover, these agents may apply hedge ratios significantly lower than one and thus mitigate risk at lower costs. Originality/value – Feedlot operators will benefit from the potential implementation of this parsimonious RSDC model for their hedging operations, as it provides average optimal hedge ratios significantly lower than one and sizeable advantages in margin risk mitigation.

Optimal Hedge Ratio and Hedging Effectiveness in Stock Futures Market: Evidence from National Stock Exchange, India

2019 ◽  
Vol 118 (3) ◽  
pp. 137-152
Author(s):  
A. Shanthi ◽  
R. Thamilselvan
Keyword(s):  
Banking Sector ◽  
Stock Exchange ◽  
Research Work ◽  
Futures Market ◽  
Least Square ◽  
Time Varying ◽  
Hedge Ratio ◽  
Hedging Effectiveness ◽  
Out Of Sample ◽  
Optimal Hedge

The major objective of the study is to examine the performance of optimal hedge ratio and hedging effectiveness in stock futures market in National Stock Exchange, India by estimating the following econometric models like Ordinary Least Square (OLS), Vector Error Correction Model (VECM) and time varying Multivariate Generalized Autoregressive Conditional Heteroscedasticity (MGARCH) model by evaluating in sample observation and out of sample observations for the period spanning from 1st January 2011 till 31st March 2018 by accommodating sixteen stock futures retrieved through www.nseindia.com by considering banking sector of Indian economy. The findings of the study indicate both the in sample and out of sample hedging performances suggest the various strategies obtained through the time varying optimal hedge ratio, which minimizes the conditional variance performs better than the employed alterative models for most of the underlying stock futures contracts in select banking sectors in India. Moreover, the study also envisage about the model selection criteria is most important for appropriate hedge ratio through risk averse investors. Finally, the research work is also in line with the previous attempts Myers (1991), Baillie and Myers (1991) and Park and Switzer (1995a, 1995b) made in the US markets

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