Hedging Effectiveness of Constant and Time Varying Hedge Ratio of the Copper in the London Metal Exchange

16 Pages Posted: 20 May 2011

See all articles by Souha Boutouria

Souha Boutouria

University of Sfax - Higher Institute of Business Administration

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory

Date Written: November 11, 2010

Abstract

This paper evaluates different hedging strategies for copper futures contracts traded at the London Metal Exchange. We estimate dynamic and constant hedge ratio for futures contracts. Various models (Minimum variance hedge ratio, OLS regression model, VAR) are used to estimate constant hedge ratio. To estimate dynamic hedge ratio, we use BEKK and VARMGARCH models.

This research provides an empirical comparison of different econometric technique in the context of hedging the market risk of copper traded at the London Metal Exchange. It is found that the VARMGARCH model estimates of time varying hedge ratio provide highest variance reduction. Besides, we examine the relation between hedging effectiveness and the maturity of the contract.

Keywords: Futures, hedging, constnat hedge ratio, time varying hedge ratio

JEL Classification: G12, G13

Suggested Citation

Boutouria, Souha and Abid, Fathi, Hedging Effectiveness of Constant and Time Varying Hedge Ratio of the Copper in the London Metal Exchange (November 11, 2010). Available at SSRN: https://ssrn.com/abstract=1831390 or http://dx.doi.org/10.2139/ssrn.1831390

Souha Boutouria (Contact Author)

University of Sfax - Higher Institute of Business Administration ( email )

Road of the Airport 4
Sfax, BP 1013
Tunisia

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory ( email )

Road of Airport, Km 4
Sfax, sfax 3018
Tunisia
+216 7427 9154 (Phone)

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