Optimal hedging strategy with futures oil markets via FIEGARCH copula model

In this work, our aim is to evaluate the hedging strategies performance of a range of traditional methods such as one-to-one, MCO, and other methods based on GARCH models and copula theory, for two spot and futures energy markets: WTI crude oil and heating oil. We model dependence structure between spot and futures oil markets using copula theory that applied to bivariate standardised residuals data obtained from two fitted univariate FIEGARCH models. This procedure permits to simultaneously capture asymmetric non-linear behaviour, dependence structure, and long memory. We use this method with different copulas functions (Joe, Frank, bb1, Gumbel, Gaussian and dynamic) to investigate hedging performance and the efficiency of copula methods in risk reduction and return improvement. The empirical results show that the combination of the FIEGARCH model and Joe copula is the best hedging strategy for both indices, because it gives the (H/E) ratio the lowest. Also the results show that the dynamic copula does not improve the results found by other strategies.