Jumping hedges: An examination of movements in copper spot and futures markets

✍ Scribed by Wing H. Chan; Denise Young

• Publisher: John Wiley and Sons
• Year: 2005
• Tongue: English
• Weight: 307 KB
• Volume: 26
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.20190

✦ Synopsis

Abstract

Price risk is an important factor for both copper purchasers, who use the commodity as a major input in their production process, and copper refiners, who must deal with cash‐flow volatility. Information from NYMEX cash and futures prices is used to examine optimal hedging behavior for agents in copper markets. A bivariate GARCH‐jump model with autoregressive jump intensity is proposed to capture the features of the joint distribution of cash and futures returns over two subperiods with different dominant pricing regimes. It is found that during the earlier producerpricing regime this specification is not needed, whereas for the later exchange pricing era jump dynamics stemming from a common jump across cash and futures series are significant in explaining the dynamics in both daily and weekly data sets. Results from the model are used to under‐take both within‐sample and out‐of‐sample hedging exercises. These results indicate that there are important gains to be made from a time‐varying optimal hedging strategy that incorporates the information from the common jump dynamics. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:169–188, 2006