McMillan D (2005) Time-varying hedge ratios for non-ferrous metals prices. Resources Policy, 30 (3), pp. 186-193. https://doi.org/10.1016/j.resourpol.2005.08.004
This paper examines the effectiveness of time-varying bivariate GARCH and GARCH-X determined hedge ratios for six non-ferrous metals cash-futures portfolios against time-invariant alternatives. The results suggest that the GARCH-X model, which incorporates the (squared) short-run deviation from a long-run cointegrating relationship in the conditional variance and covariance equations, provides the most effective hedge in five of the six cases. Thus, the results presented here strongly support the view that incorporating time-variation into the hedge ratio improves the performance of the hedge in terms of risk reduction.
Optimal hedge ratio; bivariate GARCH; spot and futures metals prices
Resources Policy: Volume 30, Issue 3
|Publication date online||26/09/2005|
|Date accepted by journal||05/08/2005|