Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia

Futures contracts are one of the most common derivatives instruments used by the investors to hedge the risk exposures that may arise from adverse price movements. The effectiveness of futures contracts in managing risks is critical to the development of futures market. To design a better strategy w...

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Main Author:	Islam, Mohd Aminul
Format:	Conference or Workshop Item
Language:	English English English English English
Published:	2016
Subjects:	HG Finance HG4501 Stocks, investment, speculation
Online Access:	http://irep.iium.edu.my/54302/ http://irep.iium.edu.my/54302/ http://irep.iium.edu.my/54302/1/IRC_Conference_Paper_Hedging%20of%20CPO%20futures_1615.pdf http://irep.iium.edu.my/54302/2/IRC_2016_Certificate.pdf http://irep.iium.edu.my/54302/3/Session%20Plan_IRC_2016.pdf http://irep.iium.edu.my/54302/4/IRC_2016_Card.pdf http://irep.iium.edu.my/54302/5/IRC-2016%20Conference_Acceptance.pdf

id	iium-54302
recordtype	eprints
spelling	iium-543022017-01-05T11:10:14Z http://irep.iium.edu.my/54302/ Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia Islam, Mohd Aminul HG Finance HG4501 Stocks, investment, speculation Futures contracts are one of the most common derivatives instruments used by the investors to hedge the risk exposures that may arise from adverse price movements. The effectiveness of futures contracts in managing risks is critical to the development of futures market. To design a better strategy with futures contracts for hedging the risk exposures, it is important that the hedger understand the optimal hedge ratio in order to be able to find the right number of futures contract for minimizing the risk. In this paper we estimated optimal hedge ratios of crude palm oil (CPO) futures contracts in Malaysia using daily settlement prices from January 4, 2010 to July 29, 2016. This comprises a total of 1615 observations. The hedge ratios are estimated by employing four competing econometric models namely: the standard Ordinary Least Square (OLS) regression, Error Correction Model (ECM), Generalized Autoregressive Conditional Heteroscedasticity (GARCH), and the bivariate GARCH (Diag-BEKK GARCH) model. The study found that the hedge ratios estimated by GARCH model are higher than those of other models for all futures contracts indicating that this model performs better in designing hedging strategy. The nearest futures contract (next one month contract) appears to be better in hedging than the far futures contracts (next two and three month contracts). The empirical finding suggests that the investor can use CPO futures contract particularly the nearest futures contract as an effective instrument to minimize the risk. 2016-12-30 Conference or Workshop Item NonPeerReviewed application/pdf en http://irep.iium.edu.my/54302/1/IRC_Conference_Paper_Hedging%20of%20CPO%20futures_1615.pdf application/pdf en http://irep.iium.edu.my/54302/2/IRC_2016_Certificate.pdf application/pdf en http://irep.iium.edu.my/54302/3/Session%20Plan_IRC_2016.pdf application/pdf en http://irep.iium.edu.my/54302/4/IRC_2016_Card.pdf application/pdf en http://irep.iium.edu.my/54302/5/IRC-2016%20Conference_Acceptance.pdf Islam, Mohd Aminul (2016) Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia. In: 31st International Research Conference on Business, Economics and Social Sciences, IRC-2016, December 29-30, 2016, Intercontinental Hotel, Kuala Lumpur. (Unpublished) http://www.ircconferences.com
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English English English English English
topic	HG Finance HG4501 Stocks, investment, speculation
spellingShingle	HG Finance HG4501 Stocks, investment, speculation Islam, Mohd Aminul Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia
description	Futures contracts are one of the most common derivatives instruments used by the investors to hedge the risk exposures that may arise from adverse price movements. The effectiveness of futures contracts in managing risks is critical to the development of futures market. To design a better strategy with futures contracts for hedging the risk exposures, it is important that the hedger understand the optimal hedge ratio in order to be able to find the right number of futures contract for minimizing the risk. In this paper we estimated optimal hedge ratios of crude palm oil (CPO) futures contracts in Malaysia using daily settlement prices from January 4, 2010 to July 29, 2016. This comprises a total of 1615 observations. The hedge ratios are estimated by employing four competing econometric models namely: the standard Ordinary Least Square (OLS) regression, Error Correction Model (ECM), Generalized Autoregressive Conditional Heteroscedasticity (GARCH), and the bivariate GARCH (Diag-BEKK GARCH) model. The study found that the hedge ratios estimated by GARCH model are higher than those of other models for all futures contracts indicating that this model performs better in designing hedging strategy. The nearest futures contract (next one month contract) appears to be better in hedging than the far futures contracts (next two and three month contracts). The empirical finding suggests that the investor can use CPO futures contract particularly the nearest futures contract as an effective instrument to minimize the risk.
format	Conference or Workshop Item
author	Islam, Mohd Aminul
author_facet	Islam, Mohd Aminul
author_sort	Islam, Mohd Aminul
title	Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia
title_short	Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia
title_full	Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia
title_fullStr	Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia
title_full_unstemmed	Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia
title_sort	estimating constant and time varying hedge ratios of crude palm oil futures (cpo) contracts in malaysia
publishDate	2016
url	http://irep.iium.edu.my/54302/ http://irep.iium.edu.my/54302/ http://irep.iium.edu.my/54302/1/IRC_Conference_Paper_Hedging%20of%20CPO%20futures_1615.pdf http://irep.iium.edu.my/54302/2/IRC_2016_Certificate.pdf http://irep.iium.edu.my/54302/3/Session%20Plan_IRC_2016.pdf http://irep.iium.edu.my/54302/4/IRC_2016_Card.pdf http://irep.iium.edu.my/54302/5/IRC-2016%20Conference_Acceptance.pdf
first_indexed	2023-09-18T21:16:51Z
last_indexed	2023-09-18T21:16:51Z
_version_	1777411619596271616

Estimating constant and time varying hedge ratios of Crude palm Oil futures (CPO) Contracts in Malaysia

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