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Optimal futures hedging for energy commodities: An application of the GAS model

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  • Yingying Xu
  • Donald Lien

Abstract

This paper applies generalized autoregressive score‐driven (GAS) models to futures hedging of crude oil and natural gas. For both commodities, the GAS framework captures the marginal distributions of spot and futures returns and corresponding dynamic copula correlations. We compare within‐sample and out‐of‐sample hedging effectiveness of GAS models against constant ordinary least square (OLS) strategy and time‐varying copula‐based GARCH models in terms of volatility reduction and Value at Risk reduction. We show that the constant OLS hedge ratio is not inherently inferior to the time‐varying alternatives. Nonetheless, GAS models tend to exhibit better hedging effectiveness than other strategies, particularly for natural gas.

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  • Yingying Xu & Donald Lien, 2020. "Optimal futures hedging for energy commodities: An application of the GAS model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1090-1108, July.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:7:p:1090-1108
    DOI: 10.1002/fut.22118
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    8. Ning Zhang & Yujing Gong & Xiaohan Xue, 2023. "Less disagreement, better forecasts: Adjusted risk measures in the energy futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(10), pages 1332-1372, October.
    9. Yu‐Sheng Lai, 2021. "Generalized autoregressive score model with high‐frequency data for optimal futures hedging," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 2023-2045, December.
    10. Lee, Hsiang-Tai & Lee, Chien-Chiang, 2022. "A regime-switching real-time copula GARCH model for optimal futures hedging," International Review of Financial Analysis, Elsevier, vol. 84(C).
    11. Pablo Urtubia & Alfonso Novales & Andrés Mora-Valencia, 2021. "Cross-Hedging Portfolios in Emerging Stock Markets: Evidence for the LATIBEX Index," Mathematics, MDPI, vol. 9(21), pages 1-19, October.
    12. You‐How Go & Jia‐Jun Teo & Kam Fong Chan, 2023. "The effectiveness of crude oil futures hedging during infectious disease outbreaks in the 21st century," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(11), pages 1559-1575, November.
    13. Yingying Xu & Donald Lien, 2022. "Forecasting volatilities of oil and gas assets: A comparison of GAS, GARCH, and EGARCH models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(2), pages 259-278, March.
    14. Xu, Yingying, 2021. "Risk spillover from energy market uncertainties to the Chinese carbon market," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    15. Wang Haoyu & Junpeng Di & Qing Han, 2023. "Adaptive hedging horizon and hedging performance estimation," Papers 2302.00251, arXiv.org.
    16. Hsiang‐Tai Lee, 2022. "A Markov regime‐switching Cholesky GARCH model for directly estimating the dynamic of optimal hedge ratio," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(3), pages 389-412, March.

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