 Hedging and speculative pressures and the transition of the spot-futures relationship in energy and metal marketsJin Suk Park and Yukun Shi International Review of Financial Analysis, 2017, vol. 54, issue C, 176-191 Abstract: This paper examines the impact of hedging and speculative pressures on the transition of the spot-futures relationship in metal and energy markets. We build a Markov regime switching (MRS) model where hedging and speculative pressures affect the transition probabilities between a stronger and weaker spot-futures relationship. It is found that hedging pressure increases the likelihood of transition, i.e. destabilises the existing spot-futures relationship, while speculative pressure reduces it, i.e. stabilises the relationship, in the copper, crude oil and natural gas markets, but this effect is relatively weak in the silver and heating oil markets. We also examine whether these findings generate practical benefits by testing the hedging effectiveness of the minimum variance hedge ratios (MVH) derived from the MRS models with hedging and speculative pressures. A relatively strong reduction of the portfolio variance, hedger's utility and value at risk (VaR) is observed in the energy markets. Keywords: Energy markets; Metal markets; Hedging pressure; Speculative pressure; Spot and futures relationship; Hedging performance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:54:y:2017:i:c:p:176-191 DOI: 10.1016/j.irfa.2016.12.001 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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