Comparative analysis of futures contract cross-hedging effectiveness for soybean: models and insights

Abstract

The purpose of this research is to investigate the use of cross-hedging inthe South African soybean market, by using the JSE BEAN contract as across-hedge instrument for the JSE SOYA contract. The research studyinvolves a detailed assessment of the data, which includes the use ofstationarity tests such as the Phillips-Perron and AugmentedDickey-Fuller, as well as the Johansen co-integration approach toanalyse long-term relationships between the variables. To evaluate the efficiency of cross-hedging strategies, three distinct hedging models are used: the ordinary least squares (OLS) model, error correction model(ECM) and EC-GARCH. The results demonstrate that these models produce significant hedge ratios. Through back-testing and the application of hedging strategies, it is determined that the JSE BEAN contract holds the potential to serve as a cross-hedge for the JSE SOYA contract in the South African soybean market. This study provides useful information for market participants and model selection in the context of cross-hedging.