Estimation of Time-Varying Hedge Ratios for Corn and Soybeans: BGARCH and Random Coefficient Approaches
Anil K. Bera
University of Illinois at Urbana-Champaign - Department of Economics
University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics
Seoul National University - Department of Agricultural Economics
Working Paper #98-0100
This paper deals with the estimation of optimal hedge ratios. A number of recent papers have demonstrated that ordinary least squares (OLS) method which gives constant hedge ratio is inappropriate and recommended the use of bivariate autoregressive conditional heteroskedastic (BGARCH) model. In this paper we introduce the use of a random coefficient autoregressive (RCAR) model to estimate time varying hedge ratios. Using daily data of spot and futures prices of corn and soybeans we find substantial presence of conditional heteroskedasticity, and also of random coefficients in the regression of return from the spot market on the return from the futures markets. Hedging performance in terms of variance reduction of returns from alternative models are also conducted. For our data set diagonal vech presentation of BGARCH model provides the largest reduction in the variance of the return portfolio.
JEL Classification: G13, Q13working papers series
Date posted: June 2, 1998
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.250 seconds