Abstract
ABSTRACT China’s newly listed live hog futures provide a standardized risk management tool for the hog market. Our paper provides the first systematic and quantitative evaluation of live hog futures’ hedging ability based on various traditional static and dynamic hedging models and an innovative quantile hedging model. Consistent results confirm that live hog futures are useful hedging tools. Specifically, the in-sample results of multiple traditional models show that the hedging ratios are around 0.4 and hedging effectiveness is 0.13. Out-of-sample hedging effectiveness increases significantly to 0.22. Quantile hedging results show more significant risk-management ability in bearish and average futures markets. We further compare live hog futures’ hedging effectiveness and market performance to other commodities. The comparison shows that the live hog futures market has modest hedging effectiveness and underperforms in liquidity, volatility, and basis. Following the empirical results, it is recommended to encourage hedging transactions, simplify trading processes, and enable night trading to enhance liquidity, lower volatility, and eventually improve hedging ability.
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