City Research Online

Abstract

This paper presents a comprehensive analysis of traditional versus selective hedging strategies in commodity futures markets. Traditional hedging aims solely to reduce spot price risk, whereas selective hedging also seeks to enhance returns by predicting movements in commodity futures prices. We construct selective hedges using a range of forecasting techniques, from simple historical averages to advanced machine learning models, and evaluate their performance based on the expected mean-variance utility of hedge portfolio returns. Out-of-sample results for 24 commodities do not favor selective hedging over traditional hedging as the former increases risk without delivering additional returns. These findings are robust across various hedge reformulations, expanding estimation windows, and rebalancing frequencies.

Publication Type:	Article
Publisher Keywords:	Traditional hedging; Selective hedging; Expected utility; Commodity futures markets
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Faculty of Finance
SWORD Depositor:	Symplectic Administrator

Export

Downloads