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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)

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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
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File Function: First Version, 2006
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Publisher 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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Related research
Keywords: portfolio choice; WTI oil volatility; optimal hedge ratio; dynamic conditional correlation;

Find related papers by JEL classification:
Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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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. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 21-39, March. [Downloadable!]
  2. Tim Bollerslev & Jeffrey Wooldridge, 1992. "Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances," Econometric Reviews, Taylor and Francis Journals, vol. 11(2), pages 143-172. [Downloadable!] (restricted)
  3. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(3), pages 507-38. [Downloadable!] (restricted)
  4. 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)
  5. Chris Brooks & Olan T. Henry & Gita Persand, 2002. "The Effect of Asymmetries on Optimal Hedge Ratios," Journal of Business, University of Chicago Press, vol. 75(2), pages 333-352, April. [Downloadable!]
  6. Ronald Ripple & Imad Moosa, 2005. "Futures Maturity and Hedging Effectiveness - The Case of Oil Futures," Research Papers 0513, Macquarie University, Department of Economics. [Downloadable!]
  7. Baillie, Richard T. & Bollerslev, Tim, 1990. "A multivariate generalized ARCH approach to modeling risk premia in forward foreign exchange rate markets," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 309-324, September. [Downloadable!] (restricted)
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