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What is a better cross-hedge for energy: Equities or other commodities?

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  • Olson, Eric
  • Vivian, Andrew
  • Wohar, Mark E.

Abstract

Can energy futures returns be effectively hedged? If so, what is the best hedge instrument? We study the hedging performance of several cross-hedges including the equity market, oil and gas equities, precious metals, industrial metals, and agricultural commodities. Our main conclusion is that cross-hedging of fluctuations in the energy market is generally not very effective and that any reduction in overall risk is small unless the oil and gas equity index is used. While all cross-hedges have performed better since 2007, the oil and gas equity index is the most effective, reducing risk by up to 20%, but it is also the most expensive.

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  • Olson, Eric & Vivian, Andrew & Wohar, Mark E., 2019. "What is a better cross-hedge for energy: Equities or other commodities?," Global Finance Journal, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:glofin:v:42:y:2019:i:c:s1044028317302259
    DOI: 10.1016/j.gfj.2018.02.003
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    More about this item

    Keywords

    Dynamic hedge ratios; Energy index; Conditional correlation; Commodity market; Equity index; Risk management;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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