Commodity Price Volatility and Time varying Hedge Ratios Evidence from the Notional Commodity Futures Indices of India
Please cite the paper as:
“Santhosh Kumar, (2012), Commodity Price Volatility and Time varying Hedge Ratios Evidence from the Notional Commodity Futures Indices of India, World Economics Association (WEA) Conferences, No. 3 2012, Rethinking Financial Markets, 1st November to 31st December, 2012”
Abstract
This paper examines the price volatility and hedging behavior of four notional commodity futures indices which represents the relevant sectors like Agriculture (AGRI), Energy (ENER), Metal (META) and an aggregate of agricultural, energy and metal commodities (COMDX), retrieved from the commodity future exchange market, Multi Commodity Exchange (MCX), of India. After adjusting for dates and missing observations, due to holidays, a total of 2175 daily closing prices over the period of 6/8/2005 to 8/18/2012 have been employed to measure volatility and hedge ratio. A GARCH (1, 1) model is employed to measure the spot return volatility of respective indices. DVECH-GARCH, BEKK- GARCH, CCC-GARCH and DCC-GARCH are used to estimate the time varying hedge ratio. Further, an in-sample performance analysis, in terms of hedged return and variance reduction approaches, of the hedge ratios estimated from the different bivariate GARCH models are also carried out. The empirical evidence confirms that all the models are able to reduce the exposure to spot market as perfectly as possible in comparison with the unhedged portfolio and in doing so the advanced extensions of bivariate GARCH models viz DCC-GARCH and CCC-GARCH, have a clear edge over its old counterparts.