Dealing with downside risk in a multi-commodity setting: A case for a “Texas hedge”?
✍ Scribed by Gabriel J. Power; Dmitry Vedenov
- Publisher
- John Wiley and Sons
- Year
- 2009
- Tongue
- English
- Weight
- 156 KB
- Volume
- 30
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Abstract
This study analyzes the problem of multi‐commodity hedging from the downside risk perspective. The lower partial moments (LPM~2~)‐minimizing hedge ratios for the stylized hedging problem of a typical Texas panhandle feedlot operator are calculated and compared with hedge ratios implied by the conventional minimum‐variance (MV) criterion. A kernel copula is used to model the joint distributions of cash and futures prices for commodities included in the model. The results are consistent with the findings in the single‐commodity case in that the MV approach leads to over‐hedging relative to the LPM~2~‐based hedge. An interesting and somewhat unexpected result is that minimization of a downside risk criterion in a multi‐commodity setting may lead to a “Texas hedge” (i.e. speculation) being an optimal strategy for at least one commodity. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:290–304, 2010