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Bivariate garch estimation of the optimal commodity futures Hedge
Author(s) -
Baillie Richard T.,
Myers Robert J.
Publication year - 1991
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950060202
Subject(s) - futures contract , autoregressive conditional heteroskedasticity , bivariate analysis , economics , econometrics , cash , hedge , conditional variance , covariance , financial economics , mathematics , statistics , finance , volatility (finance) , ecology , biology
Six different commodities are examined using daily data over two futures contract periods. Cash and futures prices for all six commodities are found to be well described as martingales with near‐integrated GARCH innovations. Bivariate GARCH models of cash and futures prices are estimated for the same six commodities. The optimal hedge ratio (OHR) is then calculated as a ratio of the conditional covariance between cash and futures to the conditional variance of futures. The estimated OHRs reveal that the standard assumption of a time‐invariant OHR is inappropriate. For each commodity the estimated OHR path appears non‐stationary, which has important implications for hedging strategies.