Hedging Effectiveness Research Articles

Development and validation of a self-administered questionnaire measuring essential knowledge in patients with rheumatoid arthritis

To develop and validate a questionnaire assessing patient knowledge in rheumatoid arthritis (RA). Knowledge considered essential for patients with RA was identified through a series of Delphi rounds among rheumatologists, health professionals (HPs), patients, and then reformulated to construct the knowledge questionnaire. Cross-sectional multicenter validation was performed in 12 rheumatology departments to assess internal validity (Kuder–Richardson coefficient), external validity, acceptability, reproducibility (Lin’s concordance correlation coefficient) and sensitivity to change (difference in total score before and after patient education sessions). Associations between patient variables and knowledge levels were evaluated. RAKE (RA Knowledge questionnairE) is a self-administered 45-item questionnaire scored 0–100, with a 32-item short-form survey assessing knowledge of disease, comorbidity, pharmacological treatments, non-pharmacological treatments, self-care and adaptative skills. Of 130 patients included in the validation study, 108 were women. Acceptability was good with < 5% missing data. Internal validity coefficient was 0.90. Mean (standard deviation) long-form score was 72.8 ± 17.8, with lower scores in comorbidity and self-care and higher scores in adaptive skills. Reproducibility was good (0.86 [0.80; 0.92]). RAKE score was positively correlated with the patients’ level of education and the HPs’ opinion on the patients’ knowledge. RAKE score showed good sensitivity to change: 66.8 ± 16.4 then 83.8 ± 12.7, representing a hedges effect size of 1.14 [95% CI 0.73; 1.55]. RAKE is an updated questionnaire assessing essential knowledge for patients with RA to enhance self-management according to current guidelines and the patients’ perspective. RAKE can usefully inform patient education interventions, routine care and research.

ASEAN-5 and Crypto Hedge Fund: Dynamic Portfolio Approach

This study aims to compose a portfolio consisting crypto hedge fund and ASEAN-5 stock market and to examine the hedging effect of crypto hedge fund against those stock markets. This study employs dynamic portfolio approach using data from the period of July 2013 to August 2021. This analysis finds that crypto hedge fund can provide hedging effect against ASEAN-5 stock portfolio resulting in hedging effectiveness with positive value. Crypto hedge fund is also proven to be able to increase the risk adjusted performance of all ASEAN-5 portfolio observed under this study, shown by an increase in Sharpe ratio and Sortino ratio.

Dynamic spillover effects and portfolio strategies between crude oil, gold and Chinese stock markets related to new energy vehicle

This paper investigates the volatility spillover effects and the dynamic relationships among WTI crude oil, gold and the Chinese stock markets of new energy vehicle, environmental protection, new energy, coal & consumable fuels, high and new technology, by adopting the method of Diebold and Yilmaz (2012, 2014) based on TVP-VAR model. The results indicate that there exists a high interdependence among all analyzed assets, and the total volatility spillover has a sharp increase under the major crisis events. On average, WTI crude oil and gold are the net receivers of the systemic shocks, while all of the analyzed stock markets are the net transmitters of the systemic shocks. Besides, the Granger causality test shows that the volatility of each asset can Granger cause the total connectedness index. Finally, we also calculate optimal hedge ratios, portfolio weights and the corresponding hedging effectiveness based on DCC-GARCH-t copula model. The empirical results show WTI crude oil and gold are cheap hedging tools. When investing a small part in WTI crude oil and a large part in the analyzed stock markets, high hedging effectiveness could be achieved.

Supply chain, product pricing, and dynamic capital structure

This paper examines how firms' reliance on a supply chain affects their capital structure decisions via the suppliers' product pricing. In our model, a firms’ reliance on a supply chain results in either a risk-amplification effect or a hedge effect, depending on the direction and magnitude of product demand correlations between firms along the supply chain. The risk-amplification (hedge) effect leads firms to reduce (increase) their leverage, pay a higher (lower) interest rate for debt, and take a more conservative (aggressive) leverage adjustment policy. Our model further captures several supply-chain-specific phenomena such as the EBIT bullwhip, risk propagation, and the supplier-driven vertical spillover effect.

Fractal Dimension Option Hedging Strategy Implementation During Turbulent Market Conditions in Developing and Developed Countries

A hedging strategy is designed to increase the likelihood of desired financial outcomes. Market speculators hedge investment positions if they are worth protecting against potential negative outcomes of turbulent market conditions and effective hedging implementation can reduce the impact severity on the underlying investment since these negative scenarios cannot be avoided. This paper provides a solution for investors to implement a trading strategy to effectively manage turbulent market conditions (such as the COVID pandemic) by implementing an investment trading approach. The investment strategy includes an index held by the investor (long position) and uses a fractal dimension indicator to warn when liquidity or sentiment changes are imminent within financial markets. When the threshold is breached at a predetermined level, the investor will take this observation as a change in liquidity in the market and a hedging position is undertaken. This sequence of events triggers the implementation of a hedging strategy by entering a buy put option position. The fractal indicator was found to be effective when applied to four of the six tested indices in terms of cumulative returns, but also in effect increased the risk taken by the investor for all six indices. The conclusion was made that where the outcome was similar for each economy type, both had a scenario where two out of the three economies outperformed the underlying index and had one index not outperforming the underlying index. This comparison was done to establish whether the hedging strategy had a more promising application to a developing or developed economy type. The fractal indicator was found to be effective when applied to four of the six tested indices in terms of cumulative returns, but also in effect increased the risk taken by the investor for all six indices.

Estimating the Optimal Hedge Ratio and the Hedge Effectiveness of LNG Contracts in Asia

Purpose This study examines the effectiveness of hedging Japan/Korea Marker (JKM) markets by estimating the optimal minimum variance hedge ratio with various models. Design/Methodology/Approach In this study, the LNG Japan/Korea Marker (JKM), which is published by Platts, was used over the period of January 02, 2014 to July 12, 2019. Both constant and dynamic hedge ratios were found using various methods including OLS, VECM, BEKK-GARCH, and the MRS model. Estimated hedge ratios through an out-of-sample analysis were evaluated through hedge effectiveness (HE). Findings Basically, the empirical results indicate that hedging effectiveness seems low in both the in-sample and out-of-sample periods. The OLS model slightly outperforms time-variant models, but generally there is no significant gap between models. It is worth noting that although OLS, VECM and BEKK-GARCH models hold relatively stable outcomes in both horizons, the MRS model experiences a large gap between 14.85% and 5.90%. Research Implications The results do not show a high hedging effectiveness for several reasons. However, considering most of studies on this issue focus on popular gas indices such as NBP, TTF and HH, this study makes a valuable contribution to the research of Asian LNG markets by comparing various hedging models for the first time.

A Minimum Variance Hedging Ratio Model Based on Nonlinear Grey Classification Model

The risk transfer function of futures market is mainly realized by hedging strategy. Futures price yield and spot price yield tend to show different fluctuations before and during hedging, which leads to the distortion of hedging ratio, that is, the calculated hedging effect is weaker than the traditional hedging effect. On the basis of MV (minimum variance) hedging model, this paper introduces NGCM (nonlinear grey classification model) to solve the nonlinear correlation between futures and spot returns, which can improve the hedging effect. The results show that, due to the existence of basis, the price change model violates the linear assumption of OLS (ordinary least squares) parameters, and there is a problem of model missetting. It is estimated that HR (hedging ratio) should choose the price model, which can better depict the linkage between futures price and spot price. The effectiveness of HR in this study is higher than that of existing models. Applying this model to hedge can effectively avoid the spot price risk. Investors can reasonably choose the hedging model according to their own needs.

Practical Applications of Inflation Hedging in the Long Run: Perspectives from Seven Centuries of Commodity Prices

In <b><i>Inflation Hedging in the Long Run: Perspectives from Seven Centuries of Commodity Prices</i></b>, published in the Summer 2021 issue of <b><i>The Journal of Alternative Investments</i></b>, <b>Adam Zaremba</b> of <b>Montpellier Business School, Jan J. Szczygielski</b> of <b>Kozminski University, Zaghum Umar</b> of <b>Zayed University</b> and <b>Mateusz Mikutowski</b> of <b>Pozna´n University of Economics and Business</b> investigate the efficacy of using commodities to hedge inflation risk. They analyze the relationship between inflation and various commodity price indexes across varying lengths of time and regions. The evaluation includes rolling correlations to see if relationships change over time. Results illustrate that commodities can be very effective hedging tools. However, some commodities do a better job than others. The optimal choice depends on what regions’ or countries’ inflation risk one seeks to mitigate, and the optimal choice can change as conditions change in the future. For example, in many countries, agricultural commodities used to be among the best hedging instruments but have since been displaced by energy commodities.

The impact of option hedging on the spot market volatility

We theoretically model and empirically quantify the feedback effect of delta hedging for the spot market volatility of the forex market. We start from an economy with two types of traders, an aggregated option market maker (OMM) and an aggregated option market taker (OMT), whose exposures reflect the total outstanding positions of all option traders in the market. A different hedge ratio of the OMM and OMT leads to a net delta hedge activity, which introduces market friction. We represent this friction by a simple linear permanent impact model. This approach allows us to derive the dependence of the spot market volatility on the gamma exposure of the traders. Our theoretical model shows that the spot market volatility is increased (decreased) by a negative (positive) gamma exposure of the OMM, whereby the amount of the increase depends on the net delta hedge amount executed in the spot market. To empirically test this model, we first reconstruct the aggregated OMM’s gamma exposure by using trade repository data and find that it is negative. The empirical analysis performed over the period from 21st October 2017 to 30th June 2018 using our reconstructed OMM data then strongly supports our theoretical model: The gamma exposure of the OMM turns out to be highly significant for the spot market volatility and, as expected, the spot market volatility is increased with the OMM’s short gamma exposure. Quantitatively, a negative gamma exposure of the OMM of approximately −1000 billion USD (which is around what we observe from our reconstructed OMM data) leads to an absolute increase in volatility of 0.7% in EURUSD and 0.9% in USDJPY.

Asymmetric and dynamic links in GCC Sukuk-stocks: Implications for portfolio management before and during the COVID-19 pandemic

This paper investigates the asymmetric and dynamic links between Sukuk and Islamic-conventional stocks for the GCC countries. It uses the VARMA-AGARCH modelling approach of McAleer, Hoti, and Chan (2009), on daily return indices for the period spanning from August 13, 2013 to December 31, 2020. Empirical results reveal the existence of interdependence both in return dynamics and shock effects as well as in volatility spillovers and cross-markets asymmetric shock spillovers. The results point out also significant dynamic interplays between Islamic and conventional equity indices. The estimated hedging effectiveness suggests that incorporating stocks in a full sukuk portfolio does not affect the variance but slightly reduce the risk-adjusted return except for DJIM GCC equity index in the full sample period. Alternatively, incorporating sukuk in a full stocks unhedged portfolio significantly reduce its variance and raise the risk-adjusted return except for the DJIM GCC equity index. We also note that sukuk is overweighted for both portfolio design and hedging strategies and provide the best profit-making portfolio. The findings continued for the COVID-19 period.

Co-jumps in the U.S. interest rates and precious metals markets and their implications for investors

Using one-minute intraday data and wavelet decomposition of stochastic processes we obtain realised VCOV matrices with and without price discontinuities in the U.S. Treasuries and precious metals futures. Our work provides determinants of co-jumps in gold, silver and U.S. Treasuries across the yield curve and empirically demonstrates impact of price discontinues on hypothetical investor through realised correlations, hedging effectiveness ratios and several portfolio settings. We find that co-jumps in gold and silver have similar monetary characteristics to co-jumps in gold or silver with U.S. Treasuries futures. We further unpack investor choices between precious metals and U.S. bonds under the presence of high-frequency risks. We show that behaviour puzzle of simultaneous demand for safety and quality during market turmoils disappears if investors are seeking maximum diversification. We also find that runs to safety do not offer statistically significant improvements in diversification benefits unlike runs to short-term quality. Other results uncover higher investments to gold due to the shifts in the U.S. yield curve and potential gains in realised hedging effectiveness for the end of the yield curve investors through asymmetry in co-jumps of gold and U.S. Treasuries during periods of extreme market volatility such as beginning of the COVID-19 pandemic.

Time-varying spillover effects and investment strategies between WTI crude oil, natural gas and Chinese stock markets related to belt and road initiative

This paper investigates the return volatility spillover effects and the dynamic relationships among WTI crude oil futures, Natural Gas futures, and the Chinese stock markets related to Belt and Road initiative employing the method of Diebold and Yilmaz (2012, 2014) based on TVP-VAR model and generalized forecast error variance decomposition. Our empirical results show that there exists a high interdependence among all analyzed assets, and the total volatility spillover has a sharp increase under the major crisis events. On average, WTI, GAS and the stock markets of FM, AGR and COM are the net receivers of systematic shocks, while the stock markets of EU, HSR and INF are the net transmitters of systematic shocks. Besides, we also calculate the hedge ratios, the optimal portfolio weights and the corresponding hedging effectiveness based on DCC-GARCH t-copula model. We find that WTI crude oil and Natural Gas futures are cheap hedging tools. When investing a small part in WTI crude oil future market and a large part in the analyzed stock markets, or investing a small part in the analyzed stock markets and a large part in Natural Gas future market, high hedging effectiveness could be achieved.

Safe-haven properties and portfolio applications of cryptocurrencies: Evidence from the emerging markets

This paper investigates the hedging and safe-haven properties of Bitcoin (BTC) and Ethereum (ETH) for emerging stock market (ESM) indices. The results show all hedging costs are increasing during the pandemic. When the study's hedging effectiveness is generally evaluated, BTC provides better protection against ESM indices than ETH. Moreover, during the pre–pandemic period, investors should create portfolios using an optimal weights-based strategy rather than a hedged portfolio-based strategy. Finally, while BTC and ETH have weak safe-haven properties against most ESM indices, only BTC have strong safe-haven properties against the Malaysia stock index during the pandemic period.

Testing the safe-haven properties of gold and bitcoin in the backdrop of COVID-19: A wavelet quantile correlation approach

We test the suitability of Gold and Bitcoin as safe-haven instruments in the backdrop of the Covid-19 related equity market meltdown by implementing the newly proposed Wavelet Quantile Correlation. We employ daily returns of Bitcoin, Gold, DJIA, CAC40, NSE50, S&P 500, NASDAQ, and EUROSTOXX from 05–01–2015 to 31–12–2020. Our results show that Gold consistently exhibits safe haven properties for all the markets except NSE in the long and short run, while Bitcoin provided mixed results. We find that Gold can act as an effective hedge and diversifier as well.

Optimizing Hedging Effectiveness of Indian Agricultural Commodity Futures: A Simulation Approach

Optimizing Hedging Effectiveness of Indian Agricultural Commodity Futures: A Simulation Approach

Data-driven financial and operational risk management: Empirical evidence from the global tramp shipping industry

The global shipping industry has long suffered from high volatilities in freight rates and bunker fuel prices that lead to significant earnings risks. This paper aims to investigate the effectiveness of financial hedging and operational risk management strategies of 31 world leading tramp shipping companies through a Bayesian Belief Network (BBN) model using various data sources. Operational risk management strategies are categorized into long-term (e.g., fleet diversity and fleet age) and short-to-medium-term (e.g., relative trip distance, fleet repositioning flexibility, and trading diversity) strategies. We innovatively quantify the short-to-medium-term operational risk management strategies using Automatic Identification System (AIS) data. The results show that financial hedging can effectively reduce bunker fuel price risk exposure but cannot reduce freight rate risk exposure. Meanwhile, companies can use operational risk management strategies to effectively reduce both risk exposures. This study provides significant implications for shipping risk management.

Why is water illiquid?: The NQH2O water index futures

AbstractThe newly launched water futures market faces a serious illiquidity problem with scarce trading volume. We examine the causes of the illiquidity based on the futures contract design literature and empirical analysis of spot water markets in the western United States. The primary cause of illiquidity is a lack of effective hedging demand for water futures due to the heterogeneity and limited size of spot water markets. The opaqueness of the water futures settlement index further deters the participation of traders. Moreover, the lack of public information on spot water market transactions also reduces its attraction to speculators.

Volatility spillovers between fine wine and major global markets during COVID-19: A portfolio hedging strategy for investors

Motivated by the growing necessity of portfolio diversification, this paper investigates the dynamic connectedness among fine wine, equities, bonds, crude oil, commodities, gold, copper, shipping and real estate by applying the Diebold and Yilmaz (2012) approach, based on the time-varying parameter vector autoregressive (TVP-VAR) model of Antonakakis et al. (2020), for the period 1/1/2010-5/31/2021. Our results indicate moderate volatility spillovers among the markets over time, whereas total connectedness is prone to exogenous shocks, reaching its peak during stress periods. Equities, crude oil, gold and fine wine are the net contributors of spillovers, whereas real estate, commodities, copper, bonds and shipping constitute the net receivers of the diffused shocks. Furthermore, we estimate and compare the hedging ability of fine wine, before and after the emergence of the coronavirus pandemic, to instruct investors in rebalancing their portfolio strategies during COVID-19. The empirical findings suggest that fine wine can form an effective hedging tool to reduce the risk deriving from adverse movements of the markets and its hedging ability was enhanced during COVID-19, with few exceptions. Regardless time period, the highest hedging effectiveness can be achieved by taking a long position in the volatility of crude oil and a short position in the volatility of fine wine.

Quantifying the hedge and safe-haven properties of bond markets for cryptocurrency indices

PurposeThis study quantified the hedge and safe haven features of bond markets for multiple cryptocurrency indices from June 2014 to April 2021 to highlight whether bond markets offer hedging facilities to uncertainty indices of cryptocurrencies.Design/methodology/approachThe authors employed the methodology of Baur and McDermott (2010) and AGDCC-GARCH model to measure the hedge and safe-haven characteristics of three bond markets (BBGT, SPGB and SKUK) for three uncertainty indexes of cryptocurrencies (UCRPR, UCRPO and ICEA).FindingsThe authors find that bond markets are neither hedge nor safe havens except for SKUK which is a safe haven investment for cryptocurrency indices and offers substantial diversification during the periods of economic fragility. In addition, the hedge effectiveness of SPGB outperforms other bonds during crisis periods and provides sufficient diversification potential for cryptocurrency indices.Practical implicationsThe findings are important for policymakers, regulatory bodies, financial firms and investors in assessing hedge and safe haven characteristics of bond markets against cryptocurrency indices.Originality/valueEmploying the novel methodology of AGDCC-GARCH with three different bond markets and three uncertainty indices of cryptocurrencies, the current study adds to the existing strand of literature in terms of quantifying hedge and safe-haven attributes of bond markets for cryptocurrency uncertainty indexes.

Searching for hedging and safe haven assets for Indian equity market – a comparison between gold, cryptocurrency and commodities

PurposeThis paper aims to evaluate the hedging and safe haven properties of gold, cryptocurrency and commodities against the Indian equity market.Design/methodology/approachFirst, the authors estimate the hedging and safe haven abilities of gold, cryptocurrency and commodities for the Indian stock market and further verify whether such properties vary across the broad stock market indices and over the different degrees of market volatility. Second, the authors use the multivariate GARCH framework to calculate the dynamic hedge ratios and hedging efficiencies to compare the hedging properties of the alternative asset classes. Third, the authors verify the robustness of the general findings during the recent crisis emanating from the outbreak of the COVID-19 pandemic.FindingsGold, cryptocurrency and most commodities have significant hedging abilities. Only natural gas, crude oil and aluminum, on the other hand, have safe haven property. Neither gold nor cryptocurrency qualifies as a safe haven asset. On the other hand, the financialization of the Indian commodities market provides a significant dividend to investors in terms of hedging and safe haven capabilities. The authors find the least negative hedge ratio and the highest positive hedging effectiveness for the stock-crude oil and stock-natural gas portfolios. The central observations of the paper remain immune to the COVID crisis.Originality/valueFocusing on the Indian equity market, the paper compares the diversification abilities of traditional assets like gold with those of the modern class of assets, including cryptocurrency and other commodities.