Skip to main content

LUP Student Papers

LUND UNIVERSITY LIBRARIES

Estimation of Time-Varying Hedge Ratios for Coffee

Lombana Betancourt, Alejandro Esteban LU and Al Azzawi, Lena LU (2013) BUSN88 20131
Department of Business Administration
Abstract
This paper will gain better insights of how to calculate the hedge ratio to reduce the basis risk and protect against the price volatility, which is caused by the mismatch between the spot and future prices. This will be done by calculating the time-varying hedge ratio for the Colombian mild Arabica coffee, using two BGARCH models, the diagonal BEKK and diagonal VECH. Four different hedging strategies performance are compared with the minimum variance criterion, during the period of 10 years between January 2003 and March 2013.
We can conclude that the time-varying hedge ratio has the smallest minimum variance out of the four portfolios. Further we can conclude that, the time-varying hedge ratio hasn’t a significant difference in the... (More)
This paper will gain better insights of how to calculate the hedge ratio to reduce the basis risk and protect against the price volatility, which is caused by the mismatch between the spot and future prices. This will be done by calculating the time-varying hedge ratio for the Colombian mild Arabica coffee, using two BGARCH models, the diagonal BEKK and diagonal VECH. Four different hedging strategies performance are compared with the minimum variance criterion, during the period of 10 years between January 2003 and March 2013.
We can conclude that the time-varying hedge ratio has the smallest minimum variance out of the four portfolios. Further we can conclude that, the time-varying hedge ratio hasn’t a significant difference in the performance, compared to OLS static hedge ratio or the naïve hedge. Therefore the reduction of the basis risk is marginal. (Less)
Please use this url to cite or link to this publication:
author
Lombana Betancourt, Alejandro Esteban LU and Al Azzawi, Lena LU
supervisor
organization
alternative title
GARCH models for the estimation of Time-Varying Hedge Ratios for Coffee
course
BUSN88 20131
year
type
H1 - Master's Degree (One Year)
subject
keywords
Hedge ratio, basis risk, GARCH, BEKK, VECH, futures contracts, coffee
language
English
id
3909854
date added to LUP
2013-07-29 12:40:54
date last changed
2013-07-29 12:40:54
@misc{3909854,
  abstract     = {This paper will gain better insights of how to calculate the hedge ratio to reduce the basis risk and protect against the price volatility, which is caused by the mismatch between the spot and future prices. This will be done by calculating the time-varying hedge ratio for the Colombian mild Arabica coffee, using two BGARCH models, the diagonal BEKK and diagonal VECH. Four different hedging strategies performance are compared with the minimum variance criterion, during the period of 10 years between January 2003 and March 2013.
We can conclude that the time-varying hedge ratio has the smallest minimum variance out of the four portfolios. Further we can conclude that, the time-varying hedge ratio hasn’t a significant difference in the performance, compared to OLS static hedge ratio or the naïve hedge. Therefore the reduction of the basis risk is marginal.},
  author       = {Lombana Betancourt, Alejandro Esteban and Al Azzawi, Lena},
  keyword      = {Hedge ratio,basis risk,GARCH,BEKK,VECH,futures contracts,coffee},
  language     = {eng},
  note         = {Student Paper},
  title        = {Estimation of Time-Varying Hedge Ratios for Coffee},
  year         = {2013},
}