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Hedgers, Investors and Futures Return Volatility: the Case of NYMEX Crude Oil

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Author Info

  • George Milunovich

    ()
    (Department of Economics, Macquarie University)

  • Ronald D. Ripple

    ()
    (Department of Economics, Macquarie University)

Abstract

We present a new model to evaluate the volatility of futures returns. The model is a combination of Dynamic Conditional Correlation and an augmented EGARCH, which allows us to evaluate the differential effects of the trading activity of two classes of optimizing traders. We apply the model to the NYMEX crude oil futures contract, and we find that the rebalancing activity of hedgers has a significant and positive effect on returns volatility. However, we also find that the rebalancing activity attributable to crude oil futures for non-hedging investors has no significant effect.

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File URL: http://www.econ.mq.edu.au/research/2006/07Milunovich-Ripple-Hedgers.pdf
File Function: First Version, 2006
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Bibliographic Info

Paper provided by Macquarie University, Department of Economics in its series Research Papers with number 0607.

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Length: 26 pages.
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:mac:wpaper:0607

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Postal: Sydney NSW 2109
Web page: http://www.econ.mq.edu.au/
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Keywords: portfolio choice; WTI oil volatility; optimal hedge ratio; dynamic conditional correlation;

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