Hedging with Chinese Metal Futures

32 Pages Posted: 13 Mar 2007

See all articles by Donald D. Lien

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

Li Yang

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

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

Lien, Donald and Yang, Li, Hedging with Chinese Metal Futures. Available at SSRN: https://ssrn.com/abstract=969562 or http://dx.doi.org/10.2139/ssrn.969562

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

Li Yang (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+610293855857 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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