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http://ssrn.com/abstract=61191
 
 

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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

Philip Garcia


University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Jae-Sun Roh


Seoul National University - Department of Agricultural Economics


Working Paper #98-0100

Abstract:     
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, Q13

working papers series


Not Available For Download

Date posted: June 2, 1998  

Suggested Citation

Bera, Anil K. and Garcia, Philip and Roh, Jae-Sun, Estimation of Time-Varying Hedge Ratios for Corn and Soybeans: BGARCH and Random Coefficient Approaches. Working Paper #98-0100. Available at SSRN: http://ssrn.com/abstract=61191

Contact Information

Anil K. Bera (Contact Author)
University of Illinois at Urbana-Champaign - Department of Economics ( email )
410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States
217-333-4596 (Phone)
217-244-6678 (Fax)
Philip Garcia
University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )
1301 W. Gregory Drive
427 Mumford Hall
Urbana, IL 61801
United States
217-333-0644 (Phone)
217-333-5538 (Fax)
Jae-Sun Roh
Seoul National University - Department of Agricultural Economics
Seoul, 151-742
Korea
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