Adjusting stacked-hedge ratios for stochastic convenience yield: a minimum variance approach

Jonathan M. Godbey and Jimmy E. Hilliard

Quantitative Finance, 2007, vol. 7, issue 3, 289-300

Abstract: Absent liquidity in long-term futures or forward markets, firms use nearby contracts to hedge long-term commitments. To hedge commodities that exhibit stochastic convenience yield, adjustments to the naive stacked hedge are necessary. Simulated and empirical tests of the hedging model using oil, copper, soybeans, gold and yen show that a stacked hedge reduces the volatility of terminal wealth. For commercial commodities, adjusting the hedge for stochastic convenience yield further reduces volatility. Kalman filter methods are used to estimate the parameters in the underlying.

Keywords: Multi-period hedge; Stacked-hedge convenience yield; Commodities; Kalman filter (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/14697680600989535 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:7:y:2007:i:3:p:289-300

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697680600989535

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().