Volatility components: The term structure dynamics of VIX futures
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This study analyzes the problem of multi-commodity hedging from the downside risk perspective. The lower partial moments (LPM2)-minimizing hedge ratios for the stylized hedging problem of a typical Texas panhandle feedlot operator are calculated and compared with hedge ratios implied by the conventional minimumvariance (MV) criterion. A kernel copula is used to model the joint distributions of cash and futures prices for commodities included in the model. The results are consistent with the findings in the single-commodity case in that the MV approach leads to over-hedging relative to the LPM2-based hedge. An interesting and somewhat unexpected result is that minimization of a downside risk criterion in a multicommodity setting may lead to a "Texas hedge" (i.e. speculation) being an optimal strategy for at least one commodity. © 2009 Wiley Periodicals, Inc.
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