Salmon price volatility: A weight-class-specific multivariate approach

Salmon spot price has been highly volatile and hard to predict since mid-2000s, obscuring the industry players’ planning decisions. ARMA-GARCH and dynamic conditional correlation (DCC) models were employed on weekly data for 1995–2013 to examine the behavior of weight-class-specific prices which are directly relevant for salmon production and risk management. Two periods of different volatility regimes were identified, before and after 2006 when the salmon market was undergoing fundamental changes. Both volatility and conditional correlations increased from 1996–2005 to 2007–2013, and return dynamics became more homogenous across weight classes. This development is conducive to the functioning of the salmon futures and options exchange.     

Hedging salmon price risk

Salmon price is highly volatile and hard to predict, which obscures planning decisions and raises financing costs for market participants. This study considers hedging the spot price uncertainty with salmon futures contracts. It uses a new framework of hedging under square loss, consisting of a new objective function, an optimal hedge ratio and a measure of hedging effectiveness. The new framework aims at minimizing the expected squared forecast error. It generalizes the classical minimum variance hedging as it relaxes the assumption of known expected prices. The salmon futures contracts deliver satisfactory hedging performance, albeit constrained by low liquidity. Therefore, I suggest holding the contract through maturity rather than closing the futures and the spot positions simultaneously. This strategy alleviates the liquidity issue and saves transaction costs. All things considered, hedging with salmon futures is a moderately effective way of handling the salmon price uncertainty.