Market Efficiency and Optimal Hedging Strategy for the US Ethanol Market

Emmanuel Hache , Anthony Paris (1)

1 EconomiX - EconomiX

The aim of this paper is to study the ethanol price dynamics in the US market and find the optimal hedging strategy. To this end, we first attempt to identify the long-term relationship between ethanol spot prices and the prices of futures contracts on the Chicago Board of Trade (CBOT). Then, we model the short-term dynamics between these two prices using a Markov-switching vector error correction model (Ms-VECM). Finally, accounting for the variance dynamics using a Gjr-MGarch error structure, we compute a time-varying hedge ratio and determine the optimal hedging strategy in the US ethanol market.

Mots clés: Ethanol prices, Futures markets, Markov-switching regime models, Hedge ratio

Domaines: Economies et finances

Emmanuel Hache, Anthony Paris. Market Efficiency and Optimal Hedging Strategy for the US Ethanol Market. 2018. ⟨hal-04141799⟩