Energy Commodities Revealed through Hedging Characteristics : Evidence from Developing and Mature Markets

What can we learn about a physical commodity by studying its hedging characteristics? We use a hedging study to shed light on important properties of ethanol (a developing market) and corn (a mature market). Our three primary innovations are empirical, with implications for all storable commodities. We identify important differences between regularly cited data sets for spot ethanol prices and clearly explain these differences in terms of the data collection methodology. The data selection implications for hedge effectiveness are found to be substantial. Having provided clarity on the data, we find consistent evidence to support the "simple is better" hypothesis in relation to hedging models. Finally we caution against complacency, as our methodology reveals how extreme events can lead to biases which reduce the hedge effectiveness at the very times when effective hedges are most needed