Hedging with Chinese Metal Futures
32 Pages Posted: 13 Mar 2007
Abstract
This paper evaluates different hedging strategies for aluminum and copper futures contracts traded at the Shanghai Futures Exchange. In addition to usual candidates such as the traditional regression hedge ratio and the hedging strategy constructed from the bivariate fractionally integrated generalized autoregressive conditional heteroskedasticity (BFIGARCH) model, two advanced specifications are proposed to account for impacts of basis between spot and futures prices on market volatility and co-movements. Empirical results suggest that the basis has asymmetric effects on the market behaviors. Moreover, the optimal hedging strategy constructed from the asymmetric BFIGARCH model produces the best in-sample and out-of-sample hedging performance.
Keywords: Time-varying Variance and Correlation, Long Memory in Volatility, Dynamic Hedging, and Chinese Metal Futures Markets
JEL Classification: C13, C32, G13
Suggested Citation: Suggested Citation
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