Analyzing the dynamics of the refining margin: implications for valuation and hedging
AbstractIt is well known that the prices of crude oil and its primary refined products (i.e., heating oil and gasoline) are cointegrated. In this paper, we extend this empirical evidence by showing that the refining margin is stationary and therefore exhibits different dynamics from crude oil or its primary refined products. Furthermore, we show that crude oil, heating oil and gasoline are not only cointegrated but also share common long-term dynamics. This finding has crucial implications in terms of managing and hedging the risk faced by refining companies because the common long-term trend finding implies that the refining margin risk only reflects short-term effects. Specifically, in this paper, a way to hedge the refining margin with crack-spread options is analyzed, and we find that assuming a common long-term trend for crude oil, heating oil and gasoline is the most accurate approach to hedging.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 12 (2012)
Issue (Month): 12 (December)
Contact details of provider:
Web page: http://www.tandfonline.com/RQUF20
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.