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Article
Testing for constant hedge ratios in commodity markets: a multivariate GARCH approach
Journal of Empirical Finance
  • Giancarlo Moschini, Iowa State University
  • Robert J. Myers, Michigan State University
Document Type
Article
Publication Version
Submitted Manuscript
Publication Date
12-1-2002
DOI
10.1016/S0927-5398(02)00012-9
Abstract
We develop a new multivariate generalized ARCH (GARCH) parameterization suitable for testing the hypothesis that the optimal futures hedge ratio is constant over time, given that the joint distribution of cash and futures prices is characterized by autoregressive conditional heteroskedasticity (ARCH). The advantage of the new parameterization is that it allows for a flexible form of time-varying volatility, even under the null of a constant hedge ratio. The model is estimated using weekly corn prices. Statistical tests reject the null hypothesis of a constant hedge ratio and also reject the null that time variation in optimal hedge ratios can be explained solely by deterministic seasonality and time to maturity effects.
Comments

This is a working paper of an article from Journal of Empirical Finance 9 (2002): 589, doi: 10.1016/S0927-5398(02)00012-9.

Citation Information
Giancarlo Moschini and Robert J. Myers. "Testing for constant hedge ratios in commodity markets: a multivariate GARCH approach" Journal of Empirical Finance Vol. 9 Iss. 5 (2002) p. 589 - 603
Available at: http://works.bepress.com/giancarlo-moschini/82/