Multiproduct Hedging: Theory, Estimation, and an Application

Fackler, Paul L.; McNew, Kevin

doi:10.2307/1349486

Cited by 51 publications

(14 citation statements)

References 22 publications

(1 reference statement)

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“…As a result, a variety of theoretical models have been proposed that view commodity price risk management as a multivariate portfolio problem. The primary contributors to the theory of multivariate hedging include the original contribution to this area by Danthine (1980, 1981), as well as the more recent contributions by Peterson and Leuthold (1987), Tzang and Leuthold (1990), and Fackler and McNew (1993).…”

Section: Introductionmentioning

confidence: 99%

The risk management effectiveness of multivariate hedging models in the U.S. soy complex

Collins

2000

J. Fut. Mark.

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Section: Introductionmentioning

confidence: 99%

The risk management effectiveness of multivariate hedging models in the U.S. soy complex

Collins

2000

J. Fut. Mark.

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“…Indeed, when risk reduction is a lesser concern, the profitable return properties of certain assets become more desirable, which can lead to speculative rather than hedging positions. Fackler and McNew (1993) provide a survey and update of the multi-product hedging literature and note that only a small number of studies have previously considered this problem in agricultural economics (with exceptions including Garcia, Roh, & Leuthold, 1995;Tzang & Leuthold, 1990, both for the soybean complex). The results of Fackler and McNew (1993) show that optimal hedge ratios in the soybean complex are slightly higher than if they were estimated individually.…”

Section: Multi-commodity Hedgingmentioning

confidence: 99%

Dealing with downside risk in a multi‐commodity setting: A case for a “Texas hedge”?

Power

Vedenov

2009

Journal of Futures Markets

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The authors thank an anonymous reviewer and the editor, Robert I. Webb, for their helpful comments, which improved the quality of the manuscript. The authors are grateful to David Anderson and Steven Klose for their help with locating data and for useful discussion of the feedlot operation model. The authors acknowledge financial support from Hatch projects RI-9262 and TEX09258. GABRIEL J. POWER* DMITRY VEDENOVThis study analyzes the problem of multi-commodity hedging from the downside risk perspective. The lower partial moments (LPM 2 )-minimizing hedge ratios for the stylized hedging problem of a typical Texas panhandle feedlot operator are calculated and compared with hedge ratios implied by the conventional minimumvariance (MV) criterion. A kernel copula is used to model the joint distributions of cash and futures prices for commodities included in the model. The results are consistent with the findings in the single-commodity case in that the MV approach leads to over-hedging relative to the LPM 2 -based hedge. An interesting and somewhat unexpected result is that minimization of a downside risk criterion in a multicommodity setting may lead to a "Texas hedge" (i.e. speculation) being an optimal strategy for at least one commodity.

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“…Only one article was devoted to establishing optimal cash and futures positions for a feedlot operator using a general portfolio framework. Fackler and McNew (1993) expanded and clarified the optimal hedging theory and its implementation for a certain kinds of production processes, however, the theory has never been applied to the cattle feeding industry. Thus, the previous research can be split into two distinct classes: studies of hedging fed cattle and sometimes feed as individual commodities in the multi-commodity framework (i.e., simultaneously), and studies of optimal hedging.…”

Section: Previous Studiesmentioning

confidence: 99%

“…Myers and Thompson (1989) elaborated on a generalized approach to estimating optimal hedge ratios for a singlecommodity case. Finally, Fackler and McNew (1993) expanded the approach of the previous article into multiple cash and futures positions, laying the framework for this study.…”

Section: Recent Studies: Optimal Hedgingmentioning

confidence: 99%

“…This observation is especially true for agricultural commodities, and is incorporated into the current research. Fackler and McNew (1993) clarified this theory to a multi-commodity case and applied it to verify effectiveness of optimal hedging for Central Illinois soybean processors, demonstrating significant advantages of the optimal hedge relative to simpler strategies.…”

Section: Recent Studies: Optimal Hedgingmentioning

confidence: 99%

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Optimal Hedging Strategies for the U.S. Cattle Feeder

Noussinov¹,

Leuthold

1998

SSRN Journal

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Multiproduct optimal hedging is compared to alternative hedging strategies as applied to a Midwestern cattle feeder. One-period feeding margin hedge ratios are estimated using weekly cash and futures price data from a simulation of a custom feedlot for 1983 -1995. Hedge ratios are estimated using the last 4 years, 6 years, or all prior data available at the moment of estimation; the ratios demonstrate less variability as the length of the underlying sample increases. Hypothesis of all hedge ratios being equal to each other, that leads to the proportional hedging model, is rejected. Means and variances of hedged feeding margins using the computed hedge ratios suggest that there is no consistent domination pattern among the alternative strategies. For the ratios computed based on all prior data available, all strategies are on the efficient frontier, leaving the hedging decision up to the agent's degree of risk aversion. All hedging strategies are shown to significantly reduce the feeding margin's means and variances compared to no hedging, with variance reduction always exceeding 50 percent. Whether a producer chooses multiproduct, single-commodity, or proportional hedge ratios is sensitive to the dataset and its size.

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Multiproduct Hedging: Theory, Estimation, and an Application

Cited by 51 publications

References 22 publications

The risk management effectiveness of multivariate hedging models in the U.S. soy complex

The risk management effectiveness of multivariate hedging models in the U.S. soy complex

Dealing with downside risk in a multi‐commodity setting: A case for a “Texas hedge”?

Optimal Hedging Strategies for the U.S. Cattle Feeder

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