Hedging U.S. Metals & Mining Industry’s Credit Risk With Industrial and Precious Metals

Posted: 5 Sep 2019

See all articles by Zaghum Umar

Zaghum Umar

Zayed University - College of Business; Netspar

Syed Jawad Hussain Shahzad

Montpellier Business School

Dimitris Kenourgios

National and Kapodistrian University of Athens - Department of Economics

Date Written: August 21, 2019

Abstract

This study examines the conditional correlation and the resulting optimal hedge ratios between the Credit Default Swap (CDS) spreads of the U.S. metal and mining industries, and the prices of copper, platinum, silver and gold using the daily date from December 14, 2007 to August 18, 2018. It compares volatility and conditional correlation of the CDSs and the metal prices by employing multivariate GARCH family models which capture distinct characteristics of financial time series. It utilizes rolling window estimation techniques and constructs the one-step-ahead out-of-sample forecasts for the dynamic conditional correlations and thereafter the optimal hedge ratios. In general, our results show that copper provides the best possible hedge for dealing with the U.S. metals and mining industries’ credit risks. Our results are robust under alternate model specifications, choice of model refits and distributional assumptions.

Keywords: Credit risk, Metal and mining industry, Precious metals, Hedging

JEL Classification: G00, G19, G32

Suggested Citation

Umar, Zaghum and Hussain Shahzad, Syed Jawad and Kenourgios, Dimitris, Hedging U.S. Metals & Mining Industry’s Credit Risk With Industrial and Precious Metals (August 21, 2019). Resources Policy, Vol. 63, 2019. Available at SSRN: https://ssrn.com/abstract=3440900

Zaghum Umar

Zayed University - College of Business ( email )

P.O. Box 4783
Abu Dhabi
United Arab Emirates

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Syed Jawad Hussain Shahzad

Montpellier Business School ( email )

Dimitris Kenourgios (Contact Author)

National and Kapodistrian University of Athens - Department of Economics ( email )

1, Sofokleous Str
Office 521
Athens, 10559
Greece
+30 210 3689449 (Phone)

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