COMPARING THE PERFORMANCES OF THE PARTIAL EQUILIBRIUM AND TIME-SERIES APPROACHES TO HEDGING

Henry L. Bryant and Michael S. Haigh

No 18972, 2003 Conference, April 21-22, 2003, St. Louis, Missouri from NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using a simple derivative with a linear payoff function (a futures contract). For various methods of parameter estimation and inference, we find that the partial equilibrium models cannot out-perform the time series model. The partial equilibrium models unpalatable assumptions of deterministically evolving futures volatility seems to impede their hedging effectiveness, even when potentially foresighted option-implied volatility term structures are employed.

Keywords: Marketing (search for similar items in EconPapers)
Pages: 33
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ncrthr:18972

DOI: 10.22004/ag.econ.18972

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