A0361
Title: Commodity hedging: Traditional or Selective
Authors: Ana-Maria Fuertes - City University London (United Kingdom) [presenting]
Joelle Miffre - Audencia Business School (France)
Adrian Fernandez-Perez - Auckland University of Technology (New Zealand)
Abstract: Commodity selective hedging aims at simultaneously covering the risk of the spot position and earning a speculative premium that reflects the hedgers' view of commodity futures price changes. The purpose is to confront the traditional minimum-variance hedging approach and many selective hedging strategies as deployed in the empirical literature that rely on historical averages as nave forecast, forecasts from AR or VAR models, equal-weighted forecasts combinations from univariate models or the direct integration of commodity pricing signals suggested in the recent style integration literature. Deploying the strategies out-of-sample for 24 commodities, it turns out that the hedgers expected utility gains versus no hedging are largest with traditional minimum-variance hedging, namely, when the speculative component of the selective hedge is ignored and the focus is on risk minimization. The superiority of the minimum variance hedging strategy exacerbates in bad times when commodity market volatility is high or during NBER recessions, and is unchallenged when considering transaction costs, alternative specifications of the selective hedges, rolling or expanding estimation windows or different rebalancing frequencies.
