Bivariate garch estimation of the optimal commodity futures Hedge
Article first published online: 7 NOV 2006
Copyright © 1991 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 6, Issue 2, pages 109–124, April/June 1991
How to Cite
Baillie, R. T. and Myers, R. J. (1991), Bivariate garch estimation of the optimal commodity futures Hedge. J. Appl. Econ., 6: 109–124. doi: 10.1002/jae.3950060202
- Issue published online: 7 NOV 2006
- Article first published online: 7 NOV 2006
- Manuscript Revised: NOV 1990
- Manuscript Received: FEB 1990
Six different commodities are examined using daily data over two futures contract periods. Cash and futures prices for all six commodities are found to be well described as martingales with near-integrated GARCH innovations. Bivariate GARCH models of cash and futures prices are estimated for the same six commodities. The optimal hedge ratio (OHR) is then calculated as a ratio of the conditional covariance between cash and futures to the conditional variance of futures. The estimated OHRs reveal that the standard assumption of a time-invariant OHR is inappropriate. For each commodity the estimated OHR path appears non-stationary, which has important implications for hedging strategies.