Dynamic multiproduct optimal hedging in the soybean complex - do time-varying correlations provide hedging improvements?

Hernan A. Tejeda and Barry Goodwin ()

Applied Economics, 2014, vol. 46, issue 27, 3312-3322

Abstract: Optimal multiproduct time-varying hedge ratios are determined - for a soybean complex - and their risk-mitigating impact is contrasted over single-commodity time-varying and naive hedge ratios. A parsimonious regime-switching dynamic correlation model is employed, with the estimated dynamic correlation matrix among prices varying between two different levels, and the time-varying correlations being applied to the multiproduct setting. Findings obtained are three-fold. First, there is significant evidence that estimated simultaneous correlations among different commodities' prices (e.g. soybean spot and soybean meal futures) attain different values along the time series. Second, there is a substantial reduction in margin variance provided by the optimal multiproduct time-varying hedge ratios over single time-varying and naive hedge ratios, for both in- and out-of-sample data. Third, average optimal multiproduct time-varying hedge ratios for soybean and soybean meal (0.82 and 0.74, respectively; for out-of-sample data) are significantly below the naive full hedge ratio, providing risk mitigation at lower costs.

Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2014.927571 (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:applec:v:46:y:2014:i:27:p:3312-3322

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036846.2014.927571

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

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