Estimation of Time-Varying Hedge Ratios for Corn and Soybeans: BGARCH and Random Coefficient Approaches

Working Paper #98-0100

Posted: 2 Jun 1998  

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

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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

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: https://ssrn.com/abstract=61191

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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