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Hedging with Gold Futures: Evidence from China and India

Yang, Jing LU and Pavlov, Oleksandr (2011) NEKM07 20111
Department of Economics
Abstract
Recently the National Commodity & Derivatives Exchange (NCDEX) and the Shanghai
Futures Exchange (SHFE) introduced gold futures trading in India and China respectively.
In developing markets like China and India it is important to manage risk. For the sake of
choosing the optimal hedge strategy it is sufficient to understand and calculate the optimal
hedge ratio. Therefore we divide our analyze on two parts. Firstly, we calculate optimal
hedge ratios for hedging spot contracts with futures contracts. Secondly, we evaluate the
hedging efficiency of these optimal hedge ratios. We use OLS, VAR and VECM models to
estimate constant hedge ratios and VAR-MGARCH to estimate... (More)
Recently the National Commodity & Derivatives Exchange (NCDEX) and the Shanghai
Futures Exchange (SHFE) introduced gold futures trading in India and China respectively.
In developing markets like China and India it is important to manage risk. For the sake of
choosing the optimal hedge strategy it is sufficient to understand and calculate the optimal
hedge ratio. Therefore we divide our analyze on two parts. Firstly, we calculate optimal
hedge ratios for hedging spot contracts with futures contracts. Secondly, we evaluate the
hedging efficiency of these optimal hedge ratios. We use OLS, VAR and VECM models to
estimate constant hedge ratios and VAR-MGARCH to estimate dynamic hedge ratios. It is
found that for both China and India VAR-MGARCH model estimates of the time varying hedge ratio give higher volatility reduction compare to the hedge ratios based on models with
constant hedge ratio. From the empirical results, we found that Indian gold futures market is
effective and Chinese gold futures market is less effective. Overall, gold futures contracts in
China and India prove to be a smart and well-needed hedging tool for clever investor. (Less)
Please use this url to cite or link to this publication:
author
Yang, Jing LU and Pavlov, Oleksandr
supervisor
organization
course
NEKM07 20111
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Gold, Futures, Hedge ratio, Hedging effectiveness, China, India
language
English
id
1974107
date added to LUP
2011-06-15 13:12:24
date last changed
2011-06-15 13:12:24
@misc{1974107,
  abstract     = {Recently  the National Commodity & Derivatives Exchange (NCDEX) and  the Shanghai 
Futures Exchange  (SHFE)  introduced  gold  futures  trading  in  India  and China  respectively.   
In developing markets  like China and  India  it  is  important  to manage  risk.    For  the sake of 
choosing  the  optimal  hedge  strategy  it  is  sufficient  to  understand  and  calculate  the  optimal 
hedge  ratio.    Therefore we divide our analyze on  two parts.    Firstly, we calculate optimal 
hedge  ratios  for  hedging  spot  contracts with  futures  contracts.    Secondly, we  evaluate  the 
hedging efficiency of  these optimal hedge  ratios. We use OLS, VAR and VECM models  to 
estimate constant hedge ratios and VAR-MGARCH to estimate dynamic hedge ratios.    It  is 
found  that  for  both China  and  India VAR-MGARCH model  estimates  of  the  time  varying hedge ratio give higher volatility reduction compare to the hedge ratios based on models with 
constant hedge ratio.    From the empirical results, we found that Indian gold futures market is 
effective and Chinese gold futures market is less effective.    Overall, gold futures contracts in 
China and India prove to be a smart and well-needed hedging tool for clever investor.},
  author       = {Yang, Jing and Pavlov, Oleksandr},
  keyword      = {Gold,Futures,Hedge ratio,Hedging effectiveness,China,India},
  language     = {eng},
  note         = {Student Paper},
  title        = {Hedging with Gold Futures: Evidence from China and India},
  year         = {2011},
}