Commodity Price Volatility and Time Varying Hedge Ratios- Evidence from Notional Commodity Futures Indices of India

Abstract

This paper examines the price volatility and hedging behavior of four notional commodity future indices which represents the relevant sectors like Agriculture (AGRJ), Energy (ENER), Metal (META) and an aggregate of agricultural, energy and metal commodities (COMDX), retrieved from the commodity future exchange market, Multi Commodity Exchange (MCX), of Indi a. A GARCH (1,1) model is employed to measure the spot return volatility of respective indices. DVECH-GARCH, BEKK- GARCH, CCC-GARCH and DCC-GAR H are used to estimate the time varying hedge ratio. Further, an in-sample performance analysis, in terms of hedged return and variance reduction approaches, of the hedge ratios estimated from the different bivariate GARCH models are also carried out. The empirical evidence confirms that all the models can reduce the exposure to spot market as perfectly as possible in comparison with tJ1e unhedged portfolio.