A further note on the optimality of the OLS hedge strategy

This note considers the hedging effectiveness of a dynamic hedge strategy as compared to the conventional OLS strategy. The conditions for the superiority of the OLS strategy are identified. It is argued that these conditions are frequently satisfied and therefore one expects to find the dominance of the OLS strategy over any dynamic strategy in the empirical work. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:308–311, 2008     

Optimal futures heading: Quadratic versus exponential utility functions

Although quadratic and exponential utility functions both lead to mean‐variance expected utility analysis, this study demonstrates that the two approaches produce different optimal futures hedging decisions. Specifically, the deviation between the optimal production level and the optimal futures position is always smaller under the exponential utility framework. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28: 208–211, 2008     

A new information share measure

In this study, we modify the information share (IS) originally proposed by Hasbrouck, J. (1995). The proposed modified information share (MIS) leads to a unique measure of price discovery instead of the upper and lower IS bounds. Performance of MIS is compared with the Hasbrouck IS measure and the Gonzalo–Granger permanent–transitory decomposition (PT/GG)‐based measure using simulations with 1,000 replications applied to the same three examples considered by Hasbrouck, J. (2002). The MIS is found to outperform both Hasbrouck IS measure and PT/GG measure. The empirical application of the MIS to three major stock indices indicates that price discovery takes place mostly in the futures market. Hence, the evidence supports the transaction cost hypothesis as well as the model proposed by Garbade, K. D., and Silber, W. L. (1983). © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:377–395, 2009     

Bad volatility is not always bad: evidence from the commodity markets

ABSTRACT

Using exchange-traded fund (ETF) options data, we examine the predictive power of variance risk premium on returns of four commodities: crude oil, natural gas, gold and silver. We also analyze the predictive power of upside and downside variance risk premiums using a decomposition model conditional on the direction of the underlying market movement. We find that both the undecomposed and decomposed variance risk premiums are able to predict commodity prices. The decomposed variance risk premiums, however, outperform the undecomposed premium. The importance of upside and downside variance risk premiums differs across markets, related to hedging demand. In energy markets, both upside and downside premiums have strong predictive power, while in precious metal markets, only the upside premium is predictive.     

Determinants of off‐farm work and its effects on farm performance: the case of Norwegian grain farmers

Limited attention has been given in the literature to the impact of off‐farm work on farm performance. More knowledge about the determinants of part‐time farming and its effects on farm performance could help policymakers to introduce better targeted rural development policies. The aim in this article is to fill part of the above‐mentioned gaps by analyzing factors that influence the choices of off‐farm work by either the farmer alone or jointly by both the farmer and partner; and simultaneously examining how off‐farm work influences farm performance. These analyses were based on an unbalanced panel data set from Norwegian grain farms during 1991 to 2005. Among the determinants of off‐farm work hours, we found that, in addition to demographic, time trend, and some regional effects, there was a significant negative effect of farm output on farmers' off‐farm work hours. The production function results revealed that off‐farm work had a positive effect on farm output, at first increasing but then decreasing with increase in hours spent in off‐farm work. Furthermore, our analysis revealed no systematic effect of off‐farm work on farm technical efficiency.     

International tenders and futures hedging

This paper examines the optimal bidding and hedging decisions of a risk‐averse firm that takes part in an international tender. The firm faces multiple sources of uncertainty: exchange rate risk, risk of an unsuccessful tender, and business risk. The firm is allowed to trade unbiased currency futures contracts to imperfectly hedge its contingent foreign exchange risk exposure. We show that the firm shorts less (more) of the unbiased futures contracts when its marginal utility function is convex (concave) as compared with the case that the marginal utility function is linear. We further show that the curvature of the marginal utility function plays a decisive role in determining the impact of currency futures hedging on the firm's bidding behavior. Sufficient conditions that ensure the firm bids more or less aggressively than in the case without hedging opportunities are derived. Copyright © 2006 John Wiley & Sons, Ltd.     

A note on the superiority of the OLS hedge ratio

Suppose that spot and futures prices are generated from an error‐correction model. This note demonstrates that, although the OLS model is misspecified, it provides a hedge ratio that usually outperforms the hedge ratio derived from the correct error‐correction model. The opposite result is possible only when the postsample incurs a major structural change from the estimation sample. ©2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:1121–1126, 2005     

Two Orthogonal Continents? Testing a Two-country DSGE Model of the US and the EU Using Indirect Inference

We examine a two country model of the EU and the US. Each has a small sector of the labour and product markets in which there is wage/price rigidity, but otherwise enjoys flexible wages and prices with a one quarter information lag. Using a VAR to represent the data, we find the model as a whole is rejected. However it is accepted for real variables, output and the real exchange rate, suggesting mis-specification lies in monetary relationships. The model highlights a lack of spillovers between the US and the EU.