Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market

This paper aims to examine the hedging performance of the crude palm Oil futures Market in Malaysia. The optimal hedge ratios and the hedging performance are examined for two different futures contracts denoted as futures 1 and futures 2 using daily settlement prices from January 4, 2010 to October...

Full description

Bibliographic Details
Main Author:	Islam, Mohd Aminul
Format:	Article
Language:	English
Published:	Euro Asia Research and Development Association EARDA 2017
Subjects:	HG4001 Financial management. Business finance. Corporation finance. HG4501 Stocks, investment, speculation
Online Access:	http://irep.iium.edu.my/60400/ http://irep.iium.edu.my/60400/ http://irep.iium.edu.my/60400/1/Published_IJRFM.pdf

id	iium-60400
recordtype	eprints
spelling	iium-604002017-12-24T13:55:38Z http://irep.iium.edu.my/60400/ Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market Islam, Mohd Aminul HG4001 Financial management. Business finance. Corporation finance. HG4501 Stocks, investment, speculation This paper aims to examine the hedging performance of the crude palm Oil futures Market in Malaysia. The optimal hedge ratios and the hedging performance are examined for two different futures contracts denoted as futures 1 and futures 2 using daily settlement prices from January 4, 2010 to October 31, 2017. Four econometric models comprising of the standard ordinary least square (OLS), vector auto-regression (VAR), vector error correction model (VECM) and the bivariate generalized autoregressive conditional heteroscedasticity (BGARCH) models are employed to compute hedge ratios. The first three models estimate constant hedge ratios while the last model estimates time varying hedge ratio. The effectiveness of the hedge ratios for two contracts is evaluated in terms of in-sample and out-of-sample performance. For in-sample performance, January 4, 2010 to October 31, 2016 period is used while for out-of-sample validation, a one year data from November 2016 to October 31, 2017 is used. The empirical results show that the bivariate GARCH model performs better in the reduction of risk for both periods and the nearest futures contract (next one month contract) appears to be better in hedging than the far futures contract (next two month contracts). This suggests that the investors can use crude palm oil futures contract particularly the nearest futures contract as an effective instrument to hedge the risk and the bivariate BEKK-GARCH as an efficient model for designing hedging strategy. Euro Asia Research and Development Association EARDA 2017-10 Article PeerReviewed application/pdf en http://irep.iium.edu.my/60400/1/Published_IJRFM.pdf Islam, Mohd Aminul (2017) Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market. International Journal of Research in Finance and Marketing, 7 (10). pp. 56-73. ISSN 2231-5985 http://euroasiapub.org/category/ijrfm/past-ijrfm/volume-7-issue-10-ijrfm-october-2017/
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English
topic	HG4001 Financial management. Business finance. Corporation finance. HG4501 Stocks, investment, speculation
spellingShingle	HG4001 Financial management. Business finance. Corporation finance. HG4501 Stocks, investment, speculation Islam, Mohd Aminul Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market
description	This paper aims to examine the hedging performance of the crude palm Oil futures Market in Malaysia. The optimal hedge ratios and the hedging performance are examined for two different futures contracts denoted as futures 1 and futures 2 using daily settlement prices from January 4, 2010 to October 31, 2017. Four econometric models comprising of the standard ordinary least square (OLS), vector auto-regression (VAR), vector error correction model (VECM) and the bivariate generalized autoregressive conditional heteroscedasticity (BGARCH) models are employed to compute hedge ratios. The first three models estimate constant hedge ratios while the last model estimates time varying hedge ratio. The effectiveness of the hedge ratios for two contracts is evaluated in terms of in-sample and out-of-sample performance. For in-sample performance, January 4, 2010 to October 31, 2016 period is used while for out-of-sample validation, a one year data from November 2016 to October 31, 2017 is used. The empirical results show that the bivariate GARCH model performs better in the reduction of risk for both periods and the nearest futures contract (next one month contract) appears to be better in hedging than the far futures contract (next two month contracts). This suggests that the investors can use crude palm oil futures contract particularly the nearest futures contract as an effective instrument to hedge the risk and the bivariate BEKK-GARCH as an efficient model for designing hedging strategy.
format	Article
author	Islam, Mohd Aminul
author_facet	Islam, Mohd Aminul
author_sort	Islam, Mohd Aminul
title	Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market
title_short	Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market
title_full	Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market
title_fullStr	Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market
title_full_unstemmed	Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market
title_sort	optimal hedge ratio and the hedging performance of commodity futures: the case of malaysian crude palm oil futures market
publisher	Euro Asia Research and Development Association EARDA
publishDate	2017
url	http://irep.iium.edu.my/60400/ http://irep.iium.edu.my/60400/ http://irep.iium.edu.my/60400/1/Published_IJRFM.pdf
first_indexed	2023-09-18T21:25:38Z
last_indexed	2023-09-18T21:25:38Z
_version_	1777412172083625984

Optimal hedge ratio and the hedging performance of commodity futures: the case of Malaysian crude palm oil futures market

Similar Items