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An Application of the Stochastic GARCH-in-Mean Model to Risk Premia in the London Metal Exchange

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Abstract

A recent paper, S. G. Hall and M. P. Taylor (1989), investigated a range of time-varying models for the risk premium for forward prices on the London Metal Exchange. By far the most successful model is the GARCH-M model, which assumes the GARCH process is exact. This paper considers how this assumption may be dropped and generates a stochastic GARCH process (SGARCH-M). This model is applied to the data used in Hall and Taylor (1989). A complication is that, under rational expectations, a second order moving average error process will exist. The model is extended to include this process. The results support the new model. Copyright 1991 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Hall, S G, 1991. "An Application of the Stochastic GARCH-in-Mean Model to Risk Premia in the London Metal Exchange," The Manchester School of Economic & Social Studies, University of Manchester, vol. 59(0), pages 57-71, Supplemen.
    • Handle: RePEc:bla:manch2:v:59:y:1991:i:0:p:57-71
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    Cited by:

    1. Clinton Watkins & Michael McAleer, 2006. "Pricing of non-ferrous metals futures on the London Metal Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 16(12), pages 853-880.
    2. Stilianos Fountas & Menelaos Karanasos & Marika Karanassou, "undated". "A GARCH Model of Inflation and Inflation Uncertainty with Simultaneous Feedback," Discussion Papers 00/24, Department of Economics, University of York.
    3. Lien, Donald & Yang, Li, 2008. "Hedging with Chinese metal futures," Global Finance Journal, Elsevier, vol. 19(2), pages 123-138.
    4. Michael McKenzie & Heather Mitchell & Robert Brooks & Robert Faff, 2001. "Power ARCH modelling of commodity futures data on the London Metal Exchange," The European Journal of Finance, Taylor & Francis Journals, vol. 7(1), pages 22-38.
    5. McKenzie, Michael D. & Brooks, Robert D. & Faff, Robert W. & Ho, Yew Kee, 2000. "Exploring the economic rationale of extremes in GARCH generated betas The case of U.S. banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(1), pages 85-106.
    6. Stilianos Fountas & Menelaos Karanasos & Marika Karanassou, "undated". "A GARCH Model of Inflation and Inflation Uncertainty with Simultaneous Feedback," Discussion Papers 00/24, Department of Economics, University of York.
    7. Menelaos Karanasos & J. Kim, "undated". "Alternative GARCH in Mean Models: An Application to the Korean Stock Market," Discussion Papers 00/25, Department of Economics, University of York.
    8. Clinton Watkins & Michael McAleer, 2004. "Econometric modelling of non‐ferrous metal prices," Journal of Economic Surveys, Wiley Blackwell, vol. 18(5), pages 651-701, December.
    9. Watkins, Clinton & McAleer, Michael, 2002. "Cointegration analysis of metals futures," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 59(1), pages 207-221.
    10. Triantafyllopoulos, Kostas, 2006. "Multivariate discount weighted regression and local level models," Computational Statistics & Data Analysis, Elsevier, vol. 50(12), pages 3702-3720, August.

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