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Hedging crude oil using refined product: A regime switching asymmetric DCC approach

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  • Pan, Zhiyuan
  • Wang, Yudong
  • Yang, Li

Abstract

In this paper, we explore the strategy on hedging crude oil using refined product. We develop a regime switching asymmetric DCC (RS-ADCC) model by taking into account both of regime switching and asymmetry in correlations. Our out-of-sample findings indicate that RS-ADCC displays greater hedging effectiveness than some conventional multivariate GARCH. Heating oil can better hedge crude oil than gasoline.

Suggested Citation

  • Pan, Zhiyuan & Wang, Yudong & Yang, Li, 2014. "Hedging crude oil using refined product: A regime switching asymmetric DCC approach," Energy Economics, Elsevier, vol. 46(C), pages 472-484.
  • Handle: RePEc:eee:eneeco:v:46:y:2014:i:c:p:472-484
    DOI: 10.1016/j.eneco.2014.05.014
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    1. repec:eee:eneeco:v:63:y:2017:i:c:p:174-184 is not listed on IDEAS
    2. repec:aen:journl:ej38-3-hanly is not listed on IDEAS
    3. Chkili, Walid, 2016. "Dynamic correlations and hedging effectiveness between gold and stock markets: Evidence for BRICS countries," Research in International Business and Finance, Elsevier, vol. 38(C), pages 22-34.
    4. repec:eee:eneeco:v:70:y:2018:i:c:p:545-562 is not listed on IDEAS
    5. Basher, Syed Abul & Sadorsky, Perry, 2016. "Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH," Energy Economics, Elsevier, vol. 54(C), pages 235-247.
    6. Cotter, John & Hanly, Jim, 2015. "Performance of utility based hedges," Energy Economics, Elsevier, vol. 49(C), pages 718-726.
    7. repec:eee:finana:v:54:y:2017:i:c:p:176-191 is not listed on IDEAS
    8. repec:eee:eneeco:v:71:y:2018:i:c:p:253-272 is not listed on IDEAS
    9. Billio, Monica & Casarin, Roberto & Osuntuyi, Anthony, 2018. "Markov switching GARCH models for Bayesian hedging on energy futures markets," Energy Economics, Elsevier, vol. 70(C), pages 545-562.

    More about this item

    Keywords

    Crude oil; Regime switching; Asymmetry; Hedging;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • 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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