The effect of the cointegration relationship on futures hedging: A note

Lien, Da-Hsiang Donald

doi:10.1002/(sici)1096-9934(199610)16:7<773::aid-fut3>3.0.co;2-l

Cited by 116 publications

(49 citation statements)

References 10 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Furthermore, as basis can been understood as an equilibrium model deviation between spot and futures price equilibrium (Viswanath, 1993;Lien, 1996), we propose the following vector error correction model to clean any autocorrelation …”

Section: The Econometric Frameworkmentioning

confidence: 99%

“…In the VAR model in equation (9), the basis described in the last column of Table 1 appears as an external variable. The basis can be seen as an error correction term when spot and futures prices are cointegrated, as this is the case (Viswanath, 1993;Lien, 1996). The inclusion of the basis in the VAR specification implies an efficient conditional estimation of the minimum variance hedge ratio (see equation (7)) as it contains important information for anticipating spot price changes.…”

Section: The Econometric Frameworkmentioning

confidence: 99%

See 1 more Smart Citation

European natural gas seasonal effects on futures hedging

Martínez

Torró

2015

Energy Economics

View full text Add to dashboard Cite

show abstract

Section: The Econometric Frameworkmentioning

confidence: 99%

Section: The Econometric Frameworkmentioning

confidence: 99%

European natural gas seasonal effects on futures hedging

Martínez

Torró

2015

Energy Economics

View full text Add to dashboard Cite

show abstract

“…However, most of the time the improvement provided by the unconditional variances are usually minimal (Lien, 1996(Lien, , 2004Moosa, 2003;Bowman, 2004). Majority of the studies on hedging effectives focus on developed markets.…”

Section: Literature Reviewmentioning

confidence: 99%

The Hedging Effectiveness and the Stability of the Optimal Hedge Ratios: Evidence for the Istanbul Stock Exchange 30 Contract

Er¹

2015

Pressacademia

View full text Add to dashboard Cite

In this paper we investigate ex ante hedging effectiveness of the Istanbul Stock Exchange 30 (ISE 30) stock index futures contract covering the period January 2007-December 2014. An optimal hedge ratio is typically calculated by regressing historical spot prices, spot price changes or spot returns on futures prices, futures price changes or returns. The slope of the regression is then used as the optimal hedge ratio. However, no guidelines are provided on what return interval and estimation period should be chosen for the calculation of returns. The empirical research has shown that hedge ratio estimates are not invariant to the return measurement interval or the estimation period. This study finds that although the daily returns for the estimation of hedge ratio provides the best ex-post performance, ex-ante tests favor hedge ratios calculated with longer return intervals and estimation periods. While one should expect greater precision for longer estimation periods, results of this study do not provide satisfactory evidence in favor of this argument.

show abstract

“…Based on Ghosh (1993) [23], Lien and Luo (1994) [24] and Lien (1996) [25], the second model described above ignores co-integration between two price series. According to their suggestions, if two series are co-integrated, a VAR model should be estimated along with the errorcorrection term which accounts for the long-run equilibrium between spot and futures price movements.…”

Section: Model Specificationmentioning

confidence: 99%

Cotton Hedging: A Comparison across Developing and Developed Countries

Wang¹,

Chidmi²

2011

View full text Add to dashboard Cite

This paper uses the results of ordinary least squares, bivariate vector autoregressive, and error correction models to estimate the hedge ratios for cotton production across different countries and to determine whether New York Cotton Exchange futures prices can serve as a hedging tool for cotton producers. Models comparison shows that the error correction model fits the data better. The results of the error correction model show that the spot prices and the NYCE futures prices are co-integrated in United States, Australia, and China, but not in Africa Franc Zone countries. In addition, for countries with higher market power, such as US and China, and countries without market distortions, such as Australia, the New York Cotton Exchange futures prices can serve as a hedging tool for cotton producers. In contrast, for less developed countries, such as Africa Franc Zone countries, and Pakistan, the NYCE futures prices cannot serve as hedging tool against the risks faced by cotton farmers.

show abstract

The effect of the cointegration relationship on futures hedging: A note

Cited by 116 publications

References 10 publications

European natural gas seasonal effects on futures hedging

European natural gas seasonal effects on futures hedging

The Hedging Effectiveness and the Stability of the Optimal Hedge Ratios: Evidence for the Istanbul Stock Exchange 30 Contract

Cotton Hedging: A Comparison across Developing and Developed Countries

Contact Info

Product

Resources

About