Gold futures contracts on comparing ordinary least squares and bivariate vector autoregression on hedging effectiveness

Abstract

Gold futures contracts are effective to be used as a hedging instrument in Thailand commodity futures exchange especially by bivariate vector autoregression model. The results indicate that constant hedge ratio after controlling for basis risk outperform the time-varying hedge ratio. Comparisons of the in-sample and out-of-sample hedging performance of each model imply that the BVAR model performs the better over OLS model. It is important for gold futures market participants to have an understanding of how effective the commodities futures are in hedging. For Thailand Future Exchange (TFEX), this paper suggests that TFEX should be further developed to provide an efficient hedging tools as other developed markets in the world do.