Hedge Performance of the Cattle Futures Contract in Brazil

Abstract

This paper examines the hedging performance of cattle futures contract at Brasil, Bolsa Balcão (B3), considering the main Brazilian livestock productions areas and assessing the different optimal hedge ratio and hedge effectiveness. Therefore, this study applied a derivation of the classical hedge ratio model, including the vector error corretion model (VECM), as well as the employment of the multivariated diagonal BEKK model for the analysis of dynamical hedge ratio and hedge effectiveness. Research dataset consist from 2012 through 2016. Overall, results point out to low hedge ratios, especially in the most distant production areas. In addition, the dynamic model also suggest that the optimal hedge ratio is lesser than 50%, suggesting a weak efficiency provided by local cattle futures contract.