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Mean-variance hedging with oil futures

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  • Liao Wang

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  • Johannes Wissel

    ()

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    Abstract

    We analyze mean-variance-optimal dynamic hedging strategies in oil futures for oil producers and consumers. In a model for the oil spot and futures market with Gaussian convenience yield curves and a stochastic market price of risk, we find analytical solutions for the optimal trading strategies. An implementation of our strategies in an out-of-sample test on market data shows that the hedging strategies improve long-term return-risk profiles of both the producer and the consumer. Copyright Springer-Verlag Berlin Heidelberg 2013

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    File URL: http://hdl.handle.net/10.1007/s00780-013-0203-x
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    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 17 (2013)
    Issue (Month): 4 (October)
    Pages: 641-683

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    Handle: RePEc:spr:finsto:v:17:y:2013:i:4:p:641-683

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    Related research

    Keywords: Mean-variance hedging; Fuel hedging; Energy futures market; 60H30; 91B30; 91G20; 91G80; C61; G11; G13;

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    1. Chen, Sheng-Syan & Lee, Cheng-few & Shrestha, Keshab, 2003. "Futures hedge ratios: a review," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 433-465.
    2. Gourieroux, Christian & Laurent, Jean-Paul & Pham, Huyên, 1996. "Mean-variance hedging and numeraire," CEPREMAP Working Papers (Couverture Orange) 9611, CEPREMAP.
    3. Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
    4. Lien, Donald & Tse, Y K, 2002. " Some Recent Developments in Futures Hedging," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 357-96, July.
    5. Ales Čern� & Jan Kallsen, 2008. "Mean-Variance Hedging And Optimal Investment In Heston'S Model With Correlation," Mathematical Finance, Wiley Blackwell, vol. 18(3), pages 473-492.
    6. Ale\v{s} \v{C}ern\'y & Jan Kallsen, 2007. "On the structure of general mean-variance hedging strategies," Papers 0708.1715, arXiv.org.
    7. Eckhard Platen, 2005. "On the Role of the Growth Optimal Portfolio in Finance," Research Paper Series 144, Quantitative Finance Research Centre, University of Technology, Sydney.
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