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Hedging against bunker price fluctuations using petroleum futures contracts: constant versus time-varying hedge ratios

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Author Info
Amir H. Alizadeh
Manolis G. Kavussanos
David A. Menachof

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Abstract

The effectiveness of hedging marine bunker price fluctuations in Rotterdam, Singapore and Houston is examined using different crude oil and petroleum future contracts traded at the New York Mercantile Exchange (NYMEX) and the International Petroleum Exchange (IPE) in London. Using both constant and dynamic hedge ratios, it is found that in and out-of-sample hedging effectiveness is different across regional bunker markets. The most effective futures instruments for out of sample hedging of spot bunker prices in Rotterdam and Singapore are the IPE crude oil futures, while for Houston it is the gas oil futures. Differences in hedging effectiveness across regional markets are attributed to the varying regional supply and demand factors in each market. In comparison to other markets, the cross-market hedging effectiveness investigated in the bunker market is low.

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

Volume (Year): 36 (2004)
Issue (Month): 12 (July)
Pages: 1337-1353
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Handle: RePEc:taf:applec:v:36:y:2004:i:12:p:1337-1353

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
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  2. 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. [Downloadable!] (restricted)
  3. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun. [Downloadable!] (restricted)
  4. Tim Bollerslev & Jeffrey M. Wooldridge, 1988. "Quasi-Maximum Likelihood Estimation of Dynamic Models with Time-Varying Covariances," Working papers 505, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Anil K. Bera & Philip Garcia & Jae-Sun Roh, 1997. "Estimation of Time-Varying Hedge Ratios for Corn and Soybeans: BGARCH and Random Coefficient Approaches," Finance 9712007, EconWPA. [Downloadable!]
  6. Kavussanos, Manolis G. & Visvikis, Ilias D., 2004. "Market interactions in returns and volatilities between spot and forward shipping freight markets," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 2015-2049, August. [Downloadable!] (restricted)
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