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Managing price risks using and local polynomial kernel forecasts

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Abstract:

This study contributes to understanding price risk management through hedging strategies in a forecasting context. A relatively new forecasting method, nonparametric local polynomial kernel (LPK), is used to forecast prices and to generate ex ante hedge ratios. The selective multiproduct hedge based on the LPK price and hedge ratio forecasts is in general found to be better than continuous hedging, no hedging and alternative forecasting procedures. Selective multivariate hedging using the LPK is found to improve hog producer's expected returns. The findings indicate that combining hedging with forecasts, especially when using the LPK procedure, can improve price risk management.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840701351915

Affiliations: 1: Department of Agricultural Economics, Department of Livestock Business Management and Marketing Economics at Konkuk University, Seoul, Korea 2: Department of Agricultural and Consumer Economics at the University of Illinois, IL, USA

Publication date: October 1, 2009

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