On the Optimal Dynamic Hedging with Nonferrous Metals

Updata:01-01-1970

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By:Eric Martial Etoundi Atenga

DOI: https://doi.org/10.30564/jesr.v2i2.450

Abstract:

This paper employs multivariate GARCH to model conditional correlations and to examine volatility spillovers and hedging possibilities with nonferrous metals traded on the London Metal Exchange (LME) market. Three different multivariate GARCH models (diagonal, CCC and DCC) are employed and contrasted. The nonferrous metals studied are copper, aluminum, tin, lead, zinc and nickel and span the period from January 6, 2000 to February 29, 2016. The multivariate DCC GARCH framework is found to fit the data in an appropriate design and provides results showing the strongest evidence of long-term persistence volatility spillovers between lead and aluminum. We also find that the Hurst exponents given by the R/S method are on average 0.94, indicating the existence of a strong degree of long-range dependence in conditional volatilities. On average, the cheapest hedge is a long position in lead and a short position in nickel. The most expensive hedge is long nickel and short copper.

References:

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