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An Investigation of Some Hedging Strategies for Crude Oil Market

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  • Andre Assis de Salles

    (Industrial Engineering Department Polytechnic School, Federal University of Rio de Janeiro, Rio de Janeiro, Brazil)

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    Abstract

    This paper examines the performance of bivariate volatility models for the crude oil spot and future returns of the WTI type barrel prices. Besides the volatility of spot and future crude oil barrel returns time series, the hedge ratio strategy is examined through the hedge effectiveness. Thus this study shows hedge strategies built using methodologies applied in the variance modelling of returns of crude oil prices in the spot and future markets, and covariance between these two market returns, which correspond to the inputs of the hedge strategy shown in this work. From the studied models the bivariate GARCH in a Diagonal VECH and BEKK representations was chosen, using three different models for the mean: a bivariate autoregressive, a vector autoregressive and a vector error correction. The methodologies used here take into consideration the denial of assumptions of homoscedasticity and normality for the return distributions making them more realistic.

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    Bibliographic Info

    Article provided by Econjournals in its journal International Journal of Energy Economics and Policy.

    Volume (Year): 3 (2013)
    Issue (Month): 1 ()
    Pages: 51-59

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    Handle: RePEc:eco:journ2:2013-01-6

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    Web page: http://www.econjournals.com

    Related research

    Keywords: Volatility Models; Future Markets; Hedge Ratio; Hedge Effectiveness; Crude Oil Market;

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    1. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    2. Chia-Lin Chang & Lydia González-Serrano & Juan-Ángel Jiménez-Martín, 2012. "Currency Hedging Strategies Using Dynamic Multivariate GARCH," Documentos de Trabajo del ICAE 2012-07, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico, revised Feb 2012.
    3. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
    4. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
    5. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March.
    6. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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