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Futures Maturity and Hedging Effectiveness - The Case of Oil Futures

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Author Info
Ronald Ripple () (Department of Economics, Macquarie University)
Imad Moosa (Department of Economics and Finance, La Trobe University)

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Abstract

This paper examines the effect of the maturity of the futures contact used as the hedging instrument on the effectiveness of futures hedging. For this purpose, daily and monthly data on the 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 (six-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.econ.mq.edu.au/research/2005/HedgingEffectiveness.pdf
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File Function: First Version, 2005
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Publisher Info
Paper provided by Macquarie University, Department of Economics in its series Research Papers with number 0513.

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Length: 20 pages.
Date of creation: Nov 2005
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Handle: RePEc:mac:wpaper:0513

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Postal: Sydney NSW 2109
Web page: http://www.econ.mq.edu.au/
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This paper has been announced in the following NEP Reports: References listed on IDEAS
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. Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-93, December. [Downloadable!] (restricted)
  2. Serletis, Apostolos, 1992. "Maturity effects in energy futures," Energy Economics, Elsevier, vol. 14(2), pages 150-157, April. [Downloadable!] (restricted)
  3. Chen, Sheng-Syan & Lee, Cheng-few & Shrestha, Keshab, 2003. "Futures hedge ratios: a review," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 433-465. [Downloadable!] (restricted)
  4. Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988. "Estimation of the Optimal Futures Hedge," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 623-30, November. [Downloadable!] (restricted)
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  5. Moosa, Imad A & Bollen, Bernard, 2001. "Is There a Maturity Effect in the Price of the S&P 500 Futures Contract?," Applied Economics Letters, Taylor and Francis Journals, vol. 8(11), pages 693-95, November. [Downloadable!] (restricted)
  6. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-97, May. [Downloadable!] (restricted)
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(explanations, 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. George Milunovich & Ronald D. Ripple, 2006. "Hedgers, Investors and Futures Return Volatility: the Case of NYMEX Crude Oil," Research Papers 0607, Macquarie University, Department of Economics. [Downloadable!]
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