Hedging Effectiveness Research Articles

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This paper examines the inflation hedging capacity of Korea’s housing return from January 1987 to December 2022. The exponential generalized autoregressive conditiuonal heteroskedasticity(EGARCH) model and a dynamic ordinary least squares (DOLS) regression were employed to study the hedging capacity of Korea’s housing return against expected and unexpected inflation over the short run and long run. The results that could be obtained through this paper is as follows. First, The empirical results show a hedge effect on expected inflation only in housing return excluding gold over the short term, but not in unexpected inflation. Second, Over the long run, housing and gold returns provide a positive inflation hedge against expected inflation only. Third, it is found that the price volatility of housing and gold have both a positive asymmetric effect on news shocks. Over the long run, an increase in wages is found to increase housing prices by promoting housing demand, While no similar evidence is found in money supply.Therefore, there is a need to implement a stable wage policy to stabilize the housing market.

The Case Study Used to Analyze How to Use Financial Derivative to Hedge Foreign Exchange Risk

In recent years, the economic cooperation between China and the rest of the world has gradually expanded, and the volume of import and export has been rising year after year. Foreign trade has become an important source of benefits for many enterprises. And after the reform of Chinese exchange rate system in 2015, the RMB exchange rate changes more frequently and the range is relatively large. In this context, many Chinese enterprises with foreign trade are facing the pressure brought by exchange rate fluctuations. This means that if an enterprise fails to reasonably manage foreign exchange risks, it may suffer serious exchange losses and thus affect the normal operation of the company. This paper taking China Southern Airlines Group Co., Ltd. and Fuyao Glass Industry Group Co., Ltd. as examples to analyzes how these two enterprises use financial derivatives to hedge foreign exchange risks to help them reduce losses or increase profits and evaluate the hedging effect of these financial derivatives. At the end of the article, the author also puts forward some relevant suggestions.

The Stability of Islamic Cryptocurrencies and Copula-Based Dependence with Alternative Crypto and Fiat Currencies

Purpose — This study aims to examine Islamic cryptocurrencies and their dependency on foreign exchange markets in vine copula architecture (CD-Vine) and provide a framework for detecting complex dependence structures, risk management implications, and hedging effectiveness. Design/Methodology/Approach — This study used gold-backed cryptocurrencies and three fiat currencies. The vine copula approach was preferred because it applies several distributions and estimates complex dependencies. Hedging effectiveness was measured by constructing simulation-based portfolios optimised with DCC-t-Copula. Benford’s law and realized variance were used to determine the stability of Islamic cryptocurrencies. Findings — According to C-Vine and D-Vine copula models, paper money has a weak tail dependence with gold-backed cryptocurrencies. Only OneGram coin, whose volatility matched the risk of Bitcoin, showed zero irregularities in volume trading. The findings were robust to different estimations based on Minimum Spanning Tree and Dendrogram. Originality/Value — This is the first study to examine Islamic cryptocurrencies’ stability and the significance of hedging effectiveness on gold-backed cryptocurrencies under a copula-based approach. Research Limitations — The study did not apply time-varying vine copula. Practical Implications — The risk management perspective shows insignificant hedge effectiveness in the portfolio of fiat and gold-backed cryptocurrencies.

The Hedging Ability of Gold, Silver and Bitcoin against Inflation in ASEAN Countries

This paper examines the hedging ability of gold, silver, and Bitcoin against inflation in ASEAN countries. The inclusion of Bitcoin as a hedge is relatively new in literature and the effect of hedging has been exacerbated post Global Financial Crisis, when the prices of precious metals have increased continuously. To serve that objective, the student-t EGARCH (1,1) model is first used to study the relationship between average asset return and inflation and next a quantile regression model is applied to explore the relationship between different quantiles of asset return and inflation. This ensures the hedging potential of each asset to be equally strong in bearish and bullish conditions. The tests show that the results from student-t EGARCH (1,1) model and quantile regression model are different while the results pre and post GFC are similar in most of the cases. The quantile regression model, which accounts for different quantiles for asset returns, indicates that gold, silver, and Bitcoin appear to be a hedge and safe haven in ASEAN countries. However, from the student-t EGARCH (1,1) model, which accounts for average asset returns, Bitcoin is a hedge asset but none of the three assets serves as a safe haven in ASEAN countries.

Do NFTs act as a good hedge and safe haven against Cryptocurrency fluctuations?

In this study, we test the hedge and safe haven properties of NFTs against Bitcoin and Ethereum market fluctuations in the backdrop of COVID-19 and the Russia-Ukraine war. We employ daily returns of Bitcoin, Ethereum, and four NFTS, namely Decentraland, Cryptopunks, Cryptokitties, and SuperRare, from 04 April 2018 to 7 July 2022. For analytical purposes, we estimate dynamic hedge effectiveness and wavelet quantile correlations. The dynamic hedge effectiveness results confirm the NFTs' hedge ability against Bitcoin. The WQC results show that NFTs offer short, medium, and long-run hedge properties and short run safe haven property against Bitcoin. Further, we show that NFTs are at best a short to medium term diversifier against Ethereum fluctuations.

Determinants and real effects of joint hedging: An empirical analysis of US oil and gas producers

We study the intensity of joint hedging of oil and gas prices by US petroleum firms. We aim to explain the rationale for and find the determinants of joint hedging, as well as its impact on firm market value, performance, and riskiness. Joint hedging that takes into account the interdependence between risks should have a positive impact on firm value in the presence of multiple risks. We verify this theory in an innovative way, by testing the effects of hedging oil and gas prices simultaneously and by using an instrumental variable framework to attenuate the problem of endogeneity between firm value and risk management. We find evidence of higher market value, higher accounting performance, and lower riskiness for firms with a high propensity to jointly hedge their oil and gas production to a greater extent. We show that joint hedging dominates single-commodity hedging.

Promoting financial stability of oil producers: Operational vs. financial hedging

This paper investigates the effects of operational hedging on commodity price risks. It explores a novel type of operational hedging, i.e., the natural operational hedge position between upstream crude oil production and downstream activities in the supply chain. Using hand-collected data from 293 unique oil-producing firms, we find that operational hedging is sufficiently effective in reducing firms’ exposure to oil-price risk. We also find an inverse relationship between operational and financial hedging, suggesting that they can substitute for each other.

Diversification, hedge, and safe-haven properties of gold and bitcoin with portfolio implications during the Russia–Ukraine war

The aim of this study is to examine the diversification, hedge, and safe-haven properties of gold and bitcoin against the main commodities exported by Russia (crude oil, natural gas, wheat) and the G7, Russia, China, and Europe market indices during the Russia–Ukraine war. The results show gold is only a diversifier during the war. Bitcoin is a strong hedge against wheat but a weak hedge against natural gas. While gold has been a strong safe-haven against Italy, Russia, the MSCI Europe index and natural gas in the extreme market declines during the war, bitcoin has not exhibited strong safe-haven properties against any asset. As a result of portfolio practices, gold generally provides a better hedge than bitcoin. However, the hedging effectiveness of gold takes relatively low values, ranging from 0.8% to 19%. The conditional diversification benefit (CDB) analysis results show that gold provides a higher and more stable CDB against assets than bitcoin. The results are significant for portfolio strategies to be implemented by investors and portfolio managers.

Hedging Covid-19 risk with ESG disclosure

Covid-19 has led to major changes worldwide and has had a significant impact on market risk. We characterize this uncertainty as innovations extracted from the Covid Risk Index on the Wall Street Journal through a textual analysis of high-dimensional data. We hedge the risk with mimicking portfolios constructed using the ESG (environmental, social, and governance) disclosure score as a measure of firm-level exposure to Covid-19 risk. The hedge portfolios perform well both in and out of sample. We also test the role of ESG in hedging and discover that during the Covid-19 pandemic firms with greater ESG disclosure generate higher returns as well as experience lower downside risk. The further analysis suggests that the portfolio returns can be explained by Covid risk shock and investment inflow, and the hedge effect mainly comes from the social part of ESG.

Research on Hedging Strategies in Gold Futures Market

Since the ratio of gold to oil and gold to silver has an important impact on the financial market, its periodic changes will affect the trading of gold, so the trading mode and strategy of gold as futures must be analyzed and judged as an important conclusion, to use the correct strategy for trading. In order to obtain the most accurate way of gold trading, the knowledge of time series was used in statistics to analyze from the perspective of ratio historical data, to obtain the cyclical data of ratio, and finally summarize a set of strategies suitable for gold trading through the method of futures trading mode in finance. The findings showed that whether "Gold/Oil Ratio" or "Gold/Silver Ratio" both have a certain periodicity. There are no permanent boom and downturns in the futures market. When there is a market surge, the price will fall back to normal, and vice versa. Finally, this study provides an effective hedging strategy in gold futures market.

Risk measurement and application of the international carbon market in the era of global conflict: A data-driven study using FCM

The accurate measurement and effective estimation of carbon market risk are crucial for practitioners and policymakers to mobilize resources toward the transition to a climate-resilient economy, particularly in a new era of global conflict. However, existing studies that have explored factors contributing to carbon market risk primarily relied on experience or subjective judgment in selecting risk-related factors. Such approaches undermine the estimation accuracy while making it difficult to ascertain causal inferences related to the risk spillover. To fill the gap, we adopted a data-driven factor analysis strategy by introducing the Fuzzy Cognitive Maps (FCM) model to establish a carbon market network and identify risk-related factors. We then evaluate the carbon market's risk level and spillover effects using combined econometric methods and explore their application in portfolio management. We report three main findings. First, based on our sample of 3217 observations between 2008 and 2022, five factors influencing carbon market risk emerged from the FCM, including OIL, COAL, SP500ENERGY, SPCLEANENERGY, and GPR. Second, we find a notable rise in risk spillover from GPR to EUA during the Russia-Ukraine conflict and an escalation of total cross-market spillover during extreme events. Third, our study presents new evidence on the hedging effect for EUA of the SP500ENERGY before the Russia-Ukraine conflict and of the SPCLEANENERGY during the conflict. Finally, implications are discussed for policymakers and investors.

Pandemics and cryptocoins

This study examines the effect of pandemic-induced uncertainty on cryptocoins (Bitcoin, Ethereum and Ripple). It employs the Westerlund and Narayan (2012, 2015) predictive model to examine the predictability of pandemic-induced uncertainty and our model's forecast performance. We examine the role of asymmetry in uncertainty and the sensitivity of our results to the recently-developed Salisu and Akanni (2020) Global Fear Index. Cryptocoins act as a hedge against uncertainty due to pandemics, albeit with reduced hedging effectiveness in the COVID-19 period. Accounting for asymmetry improves predictability and model forecast performance. Our results may be sensitive to the choice of measure of pandemic-induced uncertainty.

How media coverage news and global uncertainties drive forecast of cryptocurrencies returns?

This paper aims to investigate the impact of global financial, economic, and gold price uncertainty indices (VIX, EPU, and GVZ) and investor sentiment based on media coverage news on the returns of Bitcoin and Ethereum during the COVID-19 pandemic. We adopt an asymmetric framework based on the Quantile-on-Quantile approach, which examines the quantiles of the cryptocurrency returns, investor sentiment, and the various uncertainties indicators. The empirical findings suggest that the COVID-19 pandemic has significantly impacted cryptocurrency returns. Specifically, (i) the results demonstrate the predictive power of Economic Policy Uncertainty (EPU) during this period, as evidenced by a strong negative association between EPU and cryptocurrency returns across all quantiles; (ii) the correlation between cryptocurrency returns and the VIX index was negative but weak, across various quantile combinations of Ethereum and Bitcoin returns; (iii) an increase in COVID-19 news negatively affected Bitcoin returns across all quantiles; (iv) Bitcoin and Ethereum cannot be relied upon as effective hedging tools against global financial and economic uncertainty during the COVID-19 pandemic. Studying the behavior of cryptocurrency during uncertainty like pandemics is extremely important because it provides investors with insights on diversifying their portfolios and hedging their risks.

Selective hedging strategies for crude oil futures based on market state expectations

This paper studies the ex-ante selective hedging strategies of crude oil futures contracts based on market state expectations and compares the hedging performances to the traditional minimum variance routine hedging strategies. The main advantage of the proposed method is that it achieves a trade-off between return and risk, rather than hedges risk at all costs. Specifically, we first use a multi-input Hidden Markov Model(HMM) to identify the market state, assess the market’s herding impact, and then integrate the findings of identification and measurement to forecast the price trend. We offer an adjustment criterion for the hedge ratios driven by GARCH22GARCH is the abbreviation of Generalized AutoRegressive Conditional Heteroskedasticity.-type models based on the anticipated market state. We conducted an empirical analysis to examine the hedging effect of WTI and Brent crude oil futures, the results indicate that the proposed state-dependent hedging strategies are superior to the traditional model-driven hedging strategies concerning the hedged portfolio based on four criteria. The robustness check reveals that the proposed hedging strategies still outperform in different market situation. The findings can help traders in the crude oil markets, and the methodology can be applied to other energy markets.

Are non‐fungible token coins a good hedge against the stock market volatility?

AbstractWe test the hedge property of non‐fungible token (NFT) coins against equity market fluctuations and compare it with the hedge property of Bitcoin. We employ daily the returns of Bitcoin; three NFT coins, namely Theta, Enjin Coin and Decentraland, and three equity market indices: S&P 500, NASDAQ and CAC 40, ranging from 18 January 2018 to 12 January 2021. We estimate the hedge effectiveness of the three NFT coins and Bitcoin against stock market fluctuations. Our results suggest that NFT coins are a better hedge against equity market fluctuations than Bitcoin.

Dynamic volatility spillovers and investment strategies between crude oil, new energy, and resource related sectors

Promoting green and low-carbon development with new energy, and resource related sectors is an important way for mankind to deal with global climate change. With the marketization of new energy, the public and regulators have paid extensive attention to market relevance and risk contagion in China. In order to analyze the risk contagion mechanism, this paper examines the dynamic conditional correlation and the volatility spillover effect between crude oil, new energy, and resource related sectors. In addition, we compared the optimal diversification strategy by calculating hedging ratios and portfolio weights. The main results are as follows：First, new energy and resource related sectors have high dynamic correlation and the volatility spillover effect is significant. Second, from the perspective of net spillover index, new energy is the largest net volatility transmitter and WTI is the largest net volatility receiver. Third, when new energy is a long (short) position, the hedging efficiency of the portfolio with new energy vehicles using the hedging ratio strategy is the greatest. And when new energy is long, taking a short position in new energy vehicles is the most effective hedging strategy, but the most expensive hedging strategies are found in resource related sectors.

Using green and ESG assets to achieve post-COVID-19 environmental sustainability

PurposeThis research explores the spillovers and portfolio implications for green bonds and environmental, social and governance (ESG) assets in the context of the rapidly expanding trend in green finance investments and the need for a green recovery in the post-COVID-19 era.Design/methodology/approachThis study utilizes Diebold and Yilmaz’s (2014) spillover method and portfolio strategies (hedge ratio, optimal weights and hedging effectiveness) for the data starting from February 29, 2012, to March 14, 2022.FindingsThe study’s findings reveal that the lower volatility spillover is evidenced between the green bonds and ESG stocks during tranquil and turbulent periods (e.g. COVID-19 and Russia-Ukraine War). Furthermore, hedging costs are lower both in normal times and during economic slumps. Investing the bulk of the funds in green bonds makes it possible to achieve maximum hedging effectiveness between the S&P green bond (GB) and the S&P 500 ESG.Practical implicationsBoth investors and policymakers may use these findings to make wise investment and policy choices to achieve post-COVID environmental sustainability.Originality/valueUnlike previous research, this is the first to explore the interconnectedness among the major global and country-specific green bonds and ESG assets. The major findings of this study about the lower volatility spillovers and hedging costs between green bonds and ESG assets during the tranquil and turbulent periods may contribute to the post-COVID investment portfolio for environmental sustainability.

Effect of Hedging, Financial Lease, Sales Growth, and Earning Management on Tax Aggressiveness

This study aims to examine the effect of hedging, financial leases, sales growth, and earnings management on tax aggressiveness. The research sample consisted of 37 manufacturing companies listed on the Indonesia Stock Exchange in the 2016-2020 period. The data used in this study is secondary data and the sample selection uses a purposive sampling method. The hypothesis was tested by means of multiple regression analysis which was processed using SPSS version 22. Based on the results of the analysis, it showed that sales growth had a negative effect on tax aggressiveness. Financial lease has positive effect on tax aggressiveness. While hedging and earnings management have not been able to prove the influence of tax aggressiveness.

Approaching IRRBB and CSRBB: a case study in line with the EBA approach

EBA guidelines on Interest Rate Risk in the Banking Book (IRRBB) are designed to help EU banks effectively manage their interest rate risk and maintain a stable earnings stream. EBA also requires the credit spread risk from the banking book (CSRBB). Banks can effectively manage their exposure to interest rates and spread risks by implementing a comprehensive IRRBB and CSRBB management framework that includes: regular stress testing, sensitivity analysis, effective hedging strategies, and appropriate governance and risk management structures. Under those frameworks, banks must regularly monitor and report interest rates and credit spread risk metrics.

Construction of Mixed Derivatives Strategy for Wind Power Producers

Due to the inherent uncertainty of wind conditions as well as the price unpredictability in the competitive electricity market, wind power producers are exposed to the risk of concurrent fluctuations in both price and volume. Therefore, it is imperative to develop strategies to effectively stabilize their revenues, or cash flows, when trading wind power output in the electricity market. In light of this context, we present a novel endeavor to construct multivariate derivatives for mitigating the risk of fluctuating cash flows that are associated with trading wind power generation in electricity markets. Our approach involves leveraging nonparametric techniques to identify optimal payoff structures or compute the positions of derivatives with fine granularity, utilizing multiple underlying indexes including spot electricity price, area-wide wind power production index, and local wind conditions. These derivatives, referred to as mixed derivatives, offer advantages in terms of hedge effectiveness and contracting efficiency. Notably, we develop a methodology to enhance the hedge effects by modeling multivariate functions of wind speed and wind direction, incorporating periodicity constraints on wind direction via tensor product spline functions. By conducting an empirical analysis using data from Japan, we elucidate the extent to which the hedge effectiveness is improved by constructing mixed derivatives from various perspectives. Furthermore, we compare the hedge performance between high-granular (hourly) and low-granular (daily) formulations, revealing the advantages of utilizing a high-granular hedging approach.