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Determinants and real effects of joint hedging: An empirical analysis of the US petroleum industry

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  • Dionne, Georges

    (HEC Montreal, Canada Research Chair in Risk Management)

  • El Hraiki, Rayane

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Mnasri, Mohamed

    (HEC Montreal, Canada Research Chair in Risk Management)

Abstract

We study the intensity of joint hedging of oil and gas prices by US petroleum firms. We aim to explain the rationale for and find the determinants of joint hedging, as well as its impact on firm market value, performance, and riskiness. Joint hedging that takes into account the interdependence between risks should have a positive impact on firm value in the presence of multiple risks. We verify this theory in an innovative way, by testing the effects of hedging oil and gas prices simultaneously and by using an instrumental variable framework to attenuate the problem of endogeneity between firm value and risk management. We find evidence of higher market value, higher performance, and lower riskiness for firms with a high propensity to jointly hedge their oil and gas production to a greater extent. We show that joint hedging dominates single-commodity hedging.

Suggested Citation

  • Dionne, Georges & El Hraiki, Rayane & Mnasri, Mohamed, 2022. "Determinants and real effects of joint hedging: An empirical analysis of the US petroleum industry," Working Papers 22-4, HEC Montreal, Canada Research Chair in Risk Management.
    • Handle: RePEc:ris:crcrmw:2022_004
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    More about this item

    Keywords

    Joint hedging; enterprise risk management; oil price; gas price; hedging intensity; bivariate probit; causality; firm value;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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