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.
|Journal||Journal of Agricultural Economics|
|Publication status||Published - 2000|