Cross-commodity hedging for illiquid futures: Evidence from China's base metal futures market

Xiangyu Chen and Jittima Tongurai

Global Finance Journal, 2021, vol. 49, issue C

Abstract: This paper evaluates the effectiveness of cross-commodity hedging between China's base metal spot and futures markets, using daily data of metal spot and futures prices in the Shanghai Futures Exchange. The main findings suggest that, compared to unhedged spot portfolios, a naïve hedge increases risk exposure, while static and dynamic hedges can significantly reduce the risk of holding spot assets. Zinc futures and nickel futures outperform other base metal futures in individually hedging lead spot and tin spot respectively, while copper futures constitute a moderately optimal instrument to hedge both lead and tin spot assets.

Keywords: Commodity market; Base metal futures; Hedge strategy; Conditional correlation; Dynamic hedge ratio (search for similar items in EconPapers)
JEL-codes: C12 C32 G10 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:49:y:2021:i:c:s1044028321000508

DOI: 10.1016/j.gfj.2021.100652

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