Does Speculation in Futures Markets Improve Commodity Hedging Decisions?

47 Pages Posted: 7 Dec 2022 Last revised: 18 Feb 2024

See all articles by Adrian Fernandez-Perez

Adrian Fernandez-Perez

Auckland University of Technology

Ana-Maria Fuertes

Bayes Business School, City, University of London

Joëlle Miffre

Audencia Business School

Date Written: November 28, 2022

Abstract

This article performs a comparative analysis of traditional and selective hedging strategies in commodity futures markets. Traditional hedging is aimed solely at reducing the risk of the commodity spot positions, whereas selective hedging additionally pursues economic gains by engaging in speculation based on the hedger’s prediction of the commodity futures return. We construct selective hedges using diverse forecasting approaches that range from the naïve historical average to more sophisticated techniques such as machine learning. The hedging strategies are assessed through the less of hedging effectiveness based on the expected mean-variance utility of the hedged returns. Out-of-sample results for 24 commodities endorse traditional over selective hedging, as the latter increases risk but fails to generate additional returns. The findings survive various reformulations of the hedges, longer estimation windows, and alternative rebalancing frequencies, inter alia.

Keywords: Selective hedging; Expected utility; Risk minimization; Commodity futures markets

JEL Classification: G13, G14

Suggested Citation

Fernandez-Perez, Adrian and Fuertes, Ana-Maria and Miffre, Joelle, Does Speculation in Futures Markets Improve Commodity Hedging Decisions? (November 28, 2022). Available at SSRN: https://ssrn.com/abstract=4287561 or http://dx.doi.org/10.2139/ssrn.4287561

Adrian Fernandez-Perez

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 9 921 9999 (Phone)
+64 9 921 9940 (Fax)

Ana-Maria Fuertes

Bayes Business School, City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://bit.ly/3RxCJqu

Joelle Miffre (Contact Author)

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

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