Mg. Kavussanos et Nk. Nomikos, Constant vs. time-varying hedge ratios and hedging efficiency in the BIFFEX market, TRANSP R E, 36(4), 2000, pp. 229-248
Citations number
51
Categorie Soggetti
Politucal Science & public Administration","Civil Engineering
Journal title
TRANSPORTATION RESEARCH PART E-LOGISTICS AND TRANSPORTATION REVIEW
This paper estimates time-varying and constant hedge ratios, and investigat
es their performance in reducing freight rate risk in routes 1 and 1A of th
e Baltic Freight Index. Time-varying hedge ratios are generated by a bivari
ate error correction model with a GARCH error structure. We also introduce
an augmented GARCH (GARCH-X) model where the error correction term enters i
n the specification of the conditional covariance matrix. This specificatio
n links the concept of disequilibrium (as proxied by the magnitude of the e
rror correction term) with that of uncertainty (as reflected in the time va
rying second moments of spot and futures prices). In- and out-of-sample tes
ts reveal that the GARCH-X specification provides greater risk reduction th
an a simple GARCH and a constant hedge ratio. However, it fails to eliminat
e the riskiness of the spot position to the extent evidenced in other marke
ts in the literature. This is thought to be the result of the heterogeneous
composition of the underlying index. It seems that restructuring the compo
sition of the Baltic Freight Index (BFI) so as to reflect homogeneous shipp
ing routes may increase the hedging effectiveness of the futures contract.
This by itself indicates that the imminent introduction of the Baltic Panam
ax Index (BPI) as the underlying asset of the Baltic International Financia
l Futures Exchange (BIFFEX) contract is likely to have a beneficial impact
on the market. (C) 2000 Elsevier Science Ltd. All rights reserved.