Hedging with Chinese Aluminium Futures: International Evidence with Return and Volatility Spillover Indices Under Structural Breaks

Chi Keung Marco Lau, Mehmet Huseyin Bilgin

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

This paper examines the hedging performance of the Shanghai futures market, with the London futures market acting as the channel for volatility spillover. Taking into consideration structural change, basis effects, and return and volatility spillover effects, the authors find that the estimated hedging performance is not improved. Their findings suggest that the effectiveness of the hedging performance of aluminum futures contracts in China is not affected by the magnitude or direction of return and volatility spillovers. Therefore, even when the magnitude and direction of volatility spillover from other markets can be correctly predicted, the hedging performance of a futures contract cannot be significantly improved. This paper uses precise measures of return spillovers and volatility spillovers based directly on the framework of vector autoregressive variance decompositions. The study also includes an analysis of both crisis and noncrisis episodes, with modeling on bursts in spillovers.
Original languageEnglish
Pages (from-to)37-48
Number of pages12
JournalEmerging Markets Finance and Trade
Volume49
Issue numberSup 1
DOIs
Publication statusPublished - 2013
Externally publishedYes

Fingerprint

Aluminum
Structural breaks
Volatility spillover
Hedging
Futures contracts
Spillover
Futures markets
Shanghai
Spillover effects
China
Structural change
Modeling
Variance decomposition
Vector autoregressive

Cite this

@article{af4c9195ec384aa99f161297cb0fe086,
title = "Hedging with Chinese Aluminium Futures: International Evidence with Return and Volatility Spillover Indices Under Structural Breaks",
abstract = "This paper examines the hedging performance of the Shanghai futures market, with the London futures market acting as the channel for volatility spillover. Taking into consideration structural change, basis effects, and return and volatility spillover effects, the authors find that the estimated hedging performance is not improved. Their findings suggest that the effectiveness of the hedging performance of aluminum futures contracts in China is not affected by the magnitude or direction of return and volatility spillovers. Therefore, even when the magnitude and direction of volatility spillover from other markets can be correctly predicted, the hedging performance of a futures contract cannot be significantly improved. This paper uses precise measures of return spillovers and volatility spillovers based directly on the framework of vector autoregressive variance decompositions. The study also includes an analysis of both crisis and noncrisis episodes, with modeling on bursts in spillovers.",
keywords = "Asymmetric basis effect, Dynamic hedging strategy, Futures markets, Return and volatility spillover indices, Structural changes",
author = "Lau, {Chi Keung Marco} and Bilgin, {Mehmet Huseyin}",
year = "2013",
doi = "10.2753/REE1540-496X4901S103",
language = "English",
volume = "49",
pages = "37--48",
journal = "Emerging Markets Finance and Trade",
issn = "1540-496X",
publisher = "M.E. Sharpe Inc.",
number = "Sup 1",

}

TY - JOUR

T1 - Hedging with Chinese Aluminium Futures

T2 - International Evidence with Return and Volatility Spillover Indices Under Structural Breaks

AU - Lau, Chi Keung Marco

AU - Bilgin, Mehmet Huseyin

PY - 2013

Y1 - 2013

N2 - This paper examines the hedging performance of the Shanghai futures market, with the London futures market acting as the channel for volatility spillover. Taking into consideration structural change, basis effects, and return and volatility spillover effects, the authors find that the estimated hedging performance is not improved. Their findings suggest that the effectiveness of the hedging performance of aluminum futures contracts in China is not affected by the magnitude or direction of return and volatility spillovers. Therefore, even when the magnitude and direction of volatility spillover from other markets can be correctly predicted, the hedging performance of a futures contract cannot be significantly improved. This paper uses precise measures of return spillovers and volatility spillovers based directly on the framework of vector autoregressive variance decompositions. The study also includes an analysis of both crisis and noncrisis episodes, with modeling on bursts in spillovers.

AB - This paper examines the hedging performance of the Shanghai futures market, with the London futures market acting as the channel for volatility spillover. Taking into consideration structural change, basis effects, and return and volatility spillover effects, the authors find that the estimated hedging performance is not improved. Their findings suggest that the effectiveness of the hedging performance of aluminum futures contracts in China is not affected by the magnitude or direction of return and volatility spillovers. Therefore, even when the magnitude and direction of volatility spillover from other markets can be correctly predicted, the hedging performance of a futures contract cannot be significantly improved. This paper uses precise measures of return spillovers and volatility spillovers based directly on the framework of vector autoregressive variance decompositions. The study also includes an analysis of both crisis and noncrisis episodes, with modeling on bursts in spillovers.

KW - Asymmetric basis effect

KW - Dynamic hedging strategy

KW - Futures markets

KW - Return and volatility spillover indices

KW - Structural changes

UR - http://www.tandfonline.com/toc/mree20/current

U2 - 10.2753/REE1540-496X4901S103

DO - 10.2753/REE1540-496X4901S103

M3 - Article

VL - 49

SP - 37

EP - 48

JO - Emerging Markets Finance and Trade

JF - Emerging Markets Finance and Trade

SN - 1540-496X

IS - Sup 1

ER -