Authors: Michael Tsatsaronis, Theodore Syriopoulos

Title: Estimating and Testing Optimal Hedge Ratio Efficiency in Global Commodities Markets

Abstract

The objective of this paper is to reduce the financial risk using a dynamic hedging model for various commodities markets strongly related to seaborne trade which is characterized by extreme volatility and in some cases also by seasonality. We are going to examine four types of commodities, Freight rates and three major “bulks”, Iron Ore, Coal and Wheat. The minimum variance hedging rule is the main criterion for testing the hedging effectiveness of the different methods of estimating optimal hedge ratios using commodities Futures and Forwards. We use four different methods to estimate two kinds of hedge ratio. The first type of hedge ratio is a static one which is estimated with OLS and ECM method. The second type of hedge ratio is a time – varying one, which is estimated using a bivariate GARCH model and a Rolling Window OLS method. The second objective is to estimate the effectiveness of each hedge ratio using portfolio theory.