Spot Return Volatility and Hedging with Futures Contract : Empirical Evidence from the Notional Commodity Futures Indices of India

This study investigates price volatility and hedging behavior of four notional commodity futures indices which represent the relevant sectors like Agriculture (AGRI), Energy (ENER), Metal (META) and an aggregate of Agricultural, Energy and Metal commodities (COMDX), retrieved from the commodity futures exchange market, Multi Commodity Exchange (MCX), of India. After adjusting for dates and missing observations, due to holidays, a total of 1,563 daily closing prices over the period of June 8, 2005 to August 31, 2010 have been employed to measure the volatility and hedge ratio. A GARCH (1, 1) model was employed to measure the spot return volatility of respective indices. DVECH-GARCH, BEKK-GARCH and CCC-GARCH were utilized to estimate the time varying hedge ratio. Further, we went for an in-sample performance analysis of the hedge ratios estimated from bivariate GARCH models by employing hedged return and variance reduction approaches. The empirical evidence confirms that all the models were able to reduce the exposure to spot market as perfectly as possible in comparison to the unhedged portfolio