Time-varying hedge ratios for non-ferrous metals prices

Citation

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

Abstract
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.

Keywords
Optimal hedge ratio; bivariate GARCH; spot and futures metals prices

Journal
Resources Policy: Volume 30, Issue 3

People

Professor David McMillan

Professor in Finance, Accounting & Finance