Nonlinear Regime Shifts in Oil Price Hedging Dynamics
AbstractThe interaction between rational hedgers and informed oil traders is parameterized and tested empirically with the help of a complex non linear smooth transition regime shift CCC-GARCH procedure. In spite of their gyrations, futures price changes are usually self-correcting. Well informed producers and consumers will ensure that crude oil prices – and thus the prices of the corresponding futures contracts – fluctuate within a long run equilibrium range determined by market fundamentals. During the 2008 oil price upswing, however, shifts in positions in the futures markets by well informed optimizing agents, that usually dampen price changes, result in destabilizing positive feedback trading. Futures price changes that can be classified as speculative are due to hedgers’ reaction to movements in the variability of the return of their covered cash position.
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Bibliographic InfoPaper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze dell'Economia e Dell'Impresa in its series Working Papers Series with number wp2011_13.rdf.
Length: 26 pages
Date of creation: 2011
Date of revision:
oil price dynamics; dynamic hedging; logistic smooth transition; multivariate GARCH.;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-22 (All new papers)
- NEP-CWA-2011-09-22 (Central & Western Asia)
- NEP-ENE-2011-09-22 (Energy Economics)
- NEP-ETS-2011-09-22 (Econometric Time Series)
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