Hedging and speculative pressures and the transition of the spot-futures relationship in energy and metal markets

Park, J. S. and Shi, Y. (2017) Hedging and speculative pressures and the transition of the spot-futures relationship in energy and metal markets. International Review of Financial Analysis, 54, pp. 176-191. (doi: 10.1016/j.irfa.2016.12.001)

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Abstract

This paper examines the impact of hedging and speculative pressures on the transition of the spot-futures relationship in metal and energy markets. We build a Markov regime switching (MRS) model where hedging and speculative pressures affect the transition probabilities between a stronger and weaker spot-futures relationship. It is found that hedging pressure increases the likelihood of transition, i.e. destabilises the existing spot-futures relationship, while speculative pressure reduces it, i.e. stabilises the relationship, in the copper, crude oil and natural gas markets, but this effect is relatively weak in the silver and heating oil markets. We also examine whether these findings generate practical benefits by testing the hedging effectiveness of the minimum variance hedge ratios (MVH) derived from the MRS models with hedging and speculative pressures. A relatively strong reduction of the portfolio variance, hedger's utility and value at risk (VaR) is observed in the energy markets.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Shi, Dr Yukun
Authors: Park, J. S., and Shi, Y.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:International Review of Financial Analysis
Publisher:Elsevier
ISSN:1057-5219
ISSN (Online):1057-5219
Published Online:23 December 2016
Copyright Holders:Copyright © 2016 Elsevier
First Published:First published in International Review of Financial Analysis 54:176-191
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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