Hedging with Chinese metal futures |
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Authors: | Donald Lien Li Yang |
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Institution: | aCollege of Business, University of Texas, San Antonio, United States;bSchool of Banking and Finance, University of New South Wales, Sydney 2052, Australia |
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Abstract: | This paper evaluates different hedging strategies for aluminum and copper futures contracts traded at Shanghai Futures Exchange. In addition to usual candidates such as the traditional regression hedge ratio and the hedging strategy constructed from bivariate fractionally integrated generalized autoregressive conditional heteroskedasticity (BFIGARCH) model, two advanced specifications are proposed to account for impacts of the basis on market volatility and co-movements between spot and futures returns. Empirical results suggest that the basis has asymmetric effects and optimal hedging strategy constructed from the asymmetric BFIGARCH model tends to produce the best in-sample and out-of-sample hedging performance. |
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