The Optimal Hedging Ratio for Non-Ferrous Metals

Mihai Cristian Dinica and Dan Armeanu ()
Additional contact information
Mihai Cristian Dinica: Academy of Economic Studies, Bucharest, Romania

Journal for Economic Forecasting, 2014, issue 1, 105-122

Abstract: The increased volatility that characterized the markets during the last years emphasized the need for hedging. Given their industrial usage, the non-ferrous metals have a great importance for the economic activity. The volatility and unpredictability of metals prices create risks for an important number of companies and for the economy. The existence of basis risk leads to the need for the optimal hedge ratio estimation. Our paper estimates the optimal hedging ratio in the case of the non-ferrous metals traded on the London Metals Exchange using three methods: the ordinary least squares regression, the error-correction model, and the auto regressive distributed lag model. It also provides an in-sample and an out-of-sample comparison between these three models. The results show that the optimal hedge ratio and hedging effectiveness increase with the hedging horizon, converging to 1 for long tenors. Our findings also show that the more complex models provide a greater in-sample hedging effectiveness, but for the out-of-sample analysis the increase in performance is not significant.

Keywords: hedging; optimal hedging ratio; risk management; OLS; error-correction model (search for similar items in EconPapers)
JEL-codes: G13 G15 G32 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.ipe.ro/rjef/rjef1_14/rjef1_2014p105-122.pdf

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:rjr:romjef:v::y:2014:i:1:p:105-122

Access Statistics for this article

Journal for Economic Forecasting is currently edited by Lucian Liviu Albu and Corina Saman

More articles in Journal for Economic Forecasting from Institute for Economic Forecasting Contact information at EDIRC.
Bibliographic data for series maintained by Corina Saman ( this e-mail address is bad, please contact ).