Optimal Hedging Strategy Re-visited: Acknowledging the Existence of Non-stationary Economic Time Series
The optimal portfolio model for hedging commodity price and exchange rate risks is extended to nonstationary economic time series data. The new approach corrects the problem of unstable solutions often found with earlier models using economic time series that are nonstationary.
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bonds and foreign British Pound Capita Constant 1985 cocoa price Coffee cointegration relationships Coleman and Qian Commodity Bond commodity price risks commodity-linked bonds copper price copper-linked bond cross-currency exchange rates Crude Oil currency composition debt service Deutsche Mark develop economic intuition developing countries Dollar Exchange Rate earlier study economic time series Engle and Granger ex ante exchange rate risks export earnings Exports Per Capita external debt financial risk management foreign currency debt foreign exchange rates Granger representation theorem instruments Interest Rate 0.01 interest rate assumptions Japanese Yen Mark/US Dollar Exchange mean-variance non-stationary data non-stationary series optimal hedging optimal portfolio model Papua New Guinea permanent income hypothesis prices and foreign prices of cocoa primary commodity prices rational expectations real interest rate residual sensitive to exogenous series data spurious regression stationary Statistics Low Tail Swiss Franc Table unexpected shocks unstable solutions variables Variance Reduction VEC approach VEC representation