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Market Efficiency and Optimal Hedging Strategy for the US Ethanol Market

Author

Listed:
  • Emmanuel Hache
  • Anthony Paris

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

The aim of this paper is to study the ethanol price dynamics in the US market and find the optimal hedging strategy. To this end, we first attempt to identify the long-term relationship between ethanol spot prices and the prices of futures contracts on the Chicago Board of Trade (CBOT). Then, we model the short-term dynamics between these two prices using a Markov-switching vector error correction model (Ms-VECM). Finally, accounting for the variance dynamics using a Gjr-MGarch error structure, we compute a time-varying hedge ratio and determine the optimal hedging strategy in the US ethanol market.

Suggested Citation

  • Emmanuel Hache & Anthony Paris, 2018. "Market Efficiency and Optimal Hedging Strategy for the US Ethanol Market," Working Papers hal-04141799, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141799
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141799
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    References listed on IDEAS

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    1. Dahlgran, Roger A., 2009. "Inventory and Transformation Hedging Effectiveness in Corn Crushing," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(1), pages 1-18, April.
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    6. Abdur R. Chowdhury, 1991. "Futures market efficiency: Evidence from cointegration tests," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(5), pages 577-589, October.
    7. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-124, April-Jun.
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    9. Alizadeh, Amir H. & Nomikos, Nikos K. & Pouliasis, Panos K., 2008. "A Markov regime switching approach for hedging energy commodities," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1970-1983, September.
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    More about this item

    Keywords

    Ethanol prices; Futures markets; Markov-switching regime models; Hedge ratio;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies

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