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.

Blockchain ETFs: dynamic correlations and hedging capabilities

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ivelina Pavlova
Keyword(s):  
Composite Index ◽  
Exchange Traded Funds ◽  
Financial Assets ◽  
Content Type ◽  
Dynamic Correlations ◽  
Dynamic Relationship ◽  
Nasdaq Composite Index ◽  
Hedge Ratios ◽  
Relationship Of ◽  
High Degree

PurposeIn this paper, the authors examine the interconnectedness of four blockchain exchange-traded funds (ETFs) with other financial markets, such as stocks and cryptocurrencies.Design/methodology/approachA multivariate dynamic conditional correlation model is used to model the relationship of blockchain ETFs with equity and cryptocurrency markets. Risk-minimizing hedge ratios are calculated following the methods used in studies by Kroner and Sultan (1993) and Sadorsky (2012).FindingsThe empirical results show a high degree of correlation of blockchain ETF returns with returns of the NASDAQ Composite Index, while the level of comovement with Bitcoin is relatively low.Research limitations/implicationsThe results imply that blockchain ETFs may be suitable for hedging purposes in a portfolio holding Bitcoin. Furthermore, investing in blockchain ETFs appears similar to investing in NASDAQ.Originality/valueTo the best of the authors’ knowledge, no studies have investigated the dynamic relationship of blockchain ETFs and other financial assets.

Optimal currency hedge and the carry trade

2020 ◽  
Vol 19 (3) ◽  
pp. 411-427
Author(s):  
Fabio Filipozzi ◽  
Kersti Harkmann
Keyword(s):  
Foreign Currency ◽  
Ordinary Least Squares ◽  
Carry Trade ◽  
Portfolio Risk ◽  
Content Type ◽  
Hedging Strategies ◽  
Hedge Ratios ◽  
Sharpe Ratios ◽  
Optimal Hedge ◽  
Weekly Frequency

Purpose This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds. Design/methodology/approach The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach. Findings The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies. Originality/value The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.

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 stock market prices with WTI, Gold, VIX and cryptocurrencies: a comparison between DCC, ADCC and GO-GARCH models

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohamed Fakhfekh ◽  
Ahmed Jeribi ◽  
Ahmed Ghorbel ◽  
Nejib Hachicha
Keyword(s):  
Stock Market ◽  
Stock Markets ◽  
Multivariate Garch ◽  
Garch Models ◽  
Hedging Strategy ◽  
Market Prices ◽  
Content Type ◽  
Hedge Ratios ◽  
Multivariate Garch Models ◽  
Optimal Hedge

PurposeIn a first place, the present paper is designed to examine the dynamic correlations persistent between five cryptocurrencies, WTI, Gold, VIX and four stock markets (SP500, FTSE, NIKKEI and MSCIEM). In a second place, it investigates the relevant optimal hedging strategy.Design/methodology/approachEmpirically, the authors examine how WTI, Gold, VIX and five cryptocurrencies can be applicable to hedge the four stock markets. Three variants of multivariate GARCH models (DCC, ADCC and GO-GARCH) are implemented to estimate dynamic optimal hedge ratios.FindingsThe reached findings prove that both of the Bitcoin and Gold turn out to display remarkable hedging commodity features, while the other assets appear to demonstrate a rather noticeable disposition to act as diversifiers. Moreover, the results show that the VIX turns out to stand as the most effectively appropriate instrument, fit for hedging the stock market indices various related refits. Furthermore, the results prove that the hedging strategy instrument was indifferent for FTSE and NIKKEI stock while for the American and emerging markets, the hedging strategy was reversed from the pre-cryptocurrency crash to the during cryptocurrency crash period.Originality/valueThe first paper's empirical contribution lies in analyzing emerging cross-hedge ratios with financial assets and compare hedging effectiveness within the period of crash and the period before Bitcoin crash as well as the sensitivity of results to refits choose to compare between short term hedging strategy and long-term one.

A revisit to stock market contagion and portfolio hedging strategies

2017 ◽  
Vol 59 (5) ◽  
pp. 618-635 ◽  
Author(s):  
Amanjot Singh ◽  
Manjit Singh
Keyword(s):  
Equity Markets ◽  
Optimal Portfolio ◽  
Portfolio Risk ◽  
Content Type ◽  
Crisis Period ◽  
Hedging Strategies ◽  
Hedge Ratios ◽  
The Us ◽  
Market Contagion ◽  
Optimal Hedge

Purpose This paper aims to attempt to re-capture the stock market contagion effect from the US to the BRIC equity markets during the recent global financial crisis in a multivariate framework. Apart from this, the study also identifies optimal portfolio hedging strategies to minimize the underlying portfolio risk during the period undertaken for the purpose of study. Design/methodology/approach To account for the dynamic interactions, the study uses vector autoregression (p) dynamic conditional correlation (DCC)-asymmetric generalized autoregressive conditional heteroskedastic (1,1) model in a multivariate framework, coupled with a monthly heat map relating to the co-movement between the US and the BRIC equity markets during the period 2007-2009. Finally, by following the studies, Hammoudeh et al. (2010) and Syriopoulos et al. (2015), the time-varying optimal portfolio hedge ratios and weights are computed. Findings The results report a contagion impact of the US subprime crisis (following the collapse of the Lehman Brothers) on the Indian and Russian stock markets only. On the other hand, a higher degree of interdependence between the US and Brazilian market has been observed. The US and Chinese equity markets indicate a relatively lower level of interdependence among themselves. The optimal hedge ratios are found to be most effective for a portfolio comprising the US and Chinese stocks even during the crisis period. A US investor should invest approximately 30 cents in the Indian market and rest of the 70 cents in the US market in a US$1 portfolio to minimize the portfolio risk without lowering the expected returns. During the crisis period (2007-2009), the optimal portfolio weights indicate a higher weightage to the BRIC stocks. Practical implications The results support the construction of optimal US–BRIC stock portfolios and provide an insight to the investors and policy makers both domestic as well as international, with regard to the contagion impact and interdependence, especially during a crisis period. Originality/value The study uses a DCC model in a multivariate framework instead of bivariate, wherein all the markets are factored into a single interaction framework across a very long period (2004-2014). Second, a heat map of monthly correlation combinations has been created for the period 2007-2009, to comprehend the contagion impact or interdependence among the markets. Finally, the study ascertains time-varying optimal hedge ratios and portfolio weights for a two asset portfolio, from a US investor viewpoint, making the study first of its kind in all the perspectives.

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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