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Quantile hedge ratio for energy markets

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  • Shrestha, Keshab
  • Subramaniam, Ravichandran
  • Peranginangin, Yessy
  • Philip, Sheena Sara Suresh

Abstract

In this study, we estimate the minimum variance (MV) and quantile hedge ratios for three energy-related commodities: crude oil, heating oil and natural gas. For crude oil and heating oil, we find the quantile hedge ratios to have inverted U shape using daily data. However, for natural gas, the quantile hedge ratios are mostly below the MV hedge ratio which is significantly lower compared to naïve hedge ratio. Such behavior of hedge ratios for daily data is consistent with our empirical results which suggest that price discovery mostly takes place in the futures market for natural gas. We also estimate the hedge ratios for weekly and four-weekly hedging horizons using non-overlapping data. For the longer horizon, we use wavelet analysis to decompose the return time series into different components with respect to different time-scales. We find that, eventually for longer hedging horizons, the quantile hedge ratios converges to MV hedge ratio. The crude oil takes the shortest time-scale to achieve the convergence and the natural gas takes the longest time-scale. Finally, consistent with other studies, we find the hedging effectiveness to increase with hedging horizon.

Suggested Citation

  • Shrestha, Keshab & Subramaniam, Ravichandran & Peranginangin, Yessy & Philip, Sheena Sara Suresh, 2018. "Quantile hedge ratio for energy markets," Energy Economics, Elsevier, vol. 71(C), pages 253-272.
  • Handle: RePEc:eee:eneeco:v:71:y:2018:i:c:p:253-272
    DOI: 10.1016/j.eneco.2018.02.020
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    Cited by:

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    3. Gu, Yimiao & Chen, Zhenxi & Lien, Donald & Luo, Meifeng, 2020. "Quantile hedge ratio for forward freight market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 138(C).
    4. Wang, Yudong & Geng, Qianjie & Meng, Fanyi, 2019. "Futures hedging in crude oil markets: A comparison between minimum-variance and minimum-risk frameworks," Energy, Elsevier, vol. 181(C), pages 815-826.
    5. Yingying Xu & Donald Lien, 2020. "Optimal futures hedging for energy commodities: An application of the GAS model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1090-1108, July.

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    More about this item

    Keywords

    Hedge ratio; Minimum-variance hedge ratio; Wavelet analysis;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • G1 - Financial Economics - - General Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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