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Hedging effectiveness and futures contract maturity: the case of NYMEX crude oil futures

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Author Info

  • Ronald D. Ripple
  • Imad A. Moosa

Abstract

This article examines the effect of the maturity of the futures conract used as the hedging instrument on the effectiveness of futures hedging. For this purpose, daily and monthly data on the West Texas Intermediate (WTI) crude oil futures and spot prices are used to work out the hedge ratios and the measures of hedging effectiveness resulting from using the near-month contract and those resulting from the use of a more distant (6-month) contract. The results show that futures hedging is more effective when the near-month contract is used. They also reveal that hedge ratios are lower for near-month hedging. Some explanations are presented for these findings.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100600722177
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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 17 (2007)
Issue (Month): 9 ()
Pages: 683-689

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Handle: RePEc:taf:apfiec:v:17:y:2007:i:9:p:683-689

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Cited by:
  1. Tansuchat, R. & Chang, C-L. & McAleer, M.J., 2010. "Crude Oil Hedging Strategies Using Dynamic Multivariate GARCH," Econometric Institute Report EI 2010-10, Erasmus University Rotterdam, Econometric Institute.
  2. Chia-Lin Chang & Lydia González-Serrano & Juan-Ángel Jiménez-Martín, 2012. "Currency Hedging Strategies Using Dynamic Multivariate GARCH," Documentos del Instituto Complutense de Análisis Económico 2012-07, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, revised Feb 2012.
  3. Michael Ye & John Zyren & Joanne Shore & Thomas Lee, 2010. "Crude Oil Futures as an Indicator of Market Changes: A Graphical Analysis," International Advances in Economic Research, Springer, vol. 16(3), pages 257-268, August.
  4. John Hua Fan & Eduardo Roca & Alexandr Akimov, 2010. "Hedging With Futures Contract: Estimation and Performance Evaluation of Optimal Hedge Ratios in the European Union Emissions Trading Scheme," Discussion Papers in Finance finance:201009, Griffith University, Department of Accounting, Finance and Economics.
  5. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2010. "Market Efficiency of Oil Spot and Futures: A Mean-Variance and Stochastic Dominance Approach," Working Papers in Economics 10/18, University of Canterbury, Department of Economics and Finance.
  6. Hilal, Sawsan & Poon, Ser-Huang & Tawn, Jonathan, 2011. "Hedging the black swan: Conditional heteroskedasticity and tail dependence in S&P500 and VIX," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2374-2387, September.

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