Hedging Efficiency of Indian Commodity Futures

Abstract

This article examines the hedge ratio and hedging effectiveness in agricultural (castor seed, guar seed) and non-agricultural (copper, nickel, gold, silver, natural gas and crude oil) commodities traded in National Commodity and Derivative Exchange (NCDEX) and Multi Commodity Exchange (MCX), respectively. Constant and dynamic hedge ratios are estimated by using ordinary least square (OLS), vector autoregression (VAR), vector error correction model (VECM) and vector autoregressive-multivariate generalized autoregressive conditional heteroskedasticity model (VAR-MGARCH). The results of constant as well as dynamic hedge ratios reveal that the Indian futures market provides higher hedging effectiveness in case of precious metal (65–75 per cent) compared to industrial metal and energy commodities (less than 50 per cent). Hedging effectiveness for castor seed and natural gas is even lower than 10 per cent. This study concluded that VECM and VAR-MGARCH both are providing higher hedging although VECM is providing the highest hedge ratio. It has been found that the next to near month futures provide better hedging effectiveness as compared to near month futures for crude oil and silver. It is recommended that the policy makers should pay attention towards the number of delivery centres, standard of quality of underlying assets and transaction costs in spot market.

Can the Leading Us Energy Stock Prices Be Predicted Using the Ichimoku Cloud?

“…Similarly, while Gurrib and Kamalov (2019) reported a change in the return per unit of risk in both the natural gas and crude oil markets when comparing the pre and post 2008 crisis, Gurrib (2018a) found that an energy futures index based on leading fossil fuels like natural gas, crude oil and heating oil, was unable to predict leading stock market index movements during the 2000 bubble. Furthermore, Gupta et al (2017) reported that volatility in futures markets increased over time and is not unavoidably linked to volatility in other financial markets.…”

Investigating the Impact of Hedge Horizon Upon Hedging Effectiveness: Evidence From National Stock Exchange of India

“…Besides this, numerous studies Figlewski (1984), Kamara and Siegel (1987), Moosa (2003), Ripple and Moosa (2007), Chang et al (2013), Kumar and Pandey (2013) and Gupta et. al (2017)) observe that hedging effectiveness changes with the changing time-to-maturity of futures contracts.…”

“…one month expiry (near month futures contracts), two month expiry (next month futures contracts) and three month expiry (far month futures contracts) which began to trade from June 12, 2000 for indices and from July, 2001 for individual stocks. To the best of our knowledge, Yaganti and Kamaiah (2012), Kumar and Pandey (2013) and Gupta et al (2017) attempted to address this issue in the commodity futures market, however, none of the studies have examined hedging performance of the next and far month futures contracts in equity futures market in India, despite their respectable trading volume.…”

Functional Effectiveness of Commodity Futures Market: A Comparative Assessment of Agricultural and Metal Commodities

“…The work of Arora and Chandar (2017) too revealed a high degree of hedging effectiveness, as shown by the low variance in the hedged portfolio compared to the un-hedged portfolio. Interestingly, Gupta et al (2017) stated that traders in the non-agricultural market use the futures for more speculation drives than hedging, as evidenced by the high speculation ratio and low speculation activity in agricultural commodities.…”