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Hedging effectiveness and futures contract maturity: the case of NYMEX crude oil futures

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  • Ronald D. Ripple
  • Imad A. Moosa

Abstract

This article examines the effect of the maturity of the futures conract used as the hedging instrument on the effectiveness of futures hedging. For this purpose, daily and monthly data on the West Texas Intermediate (WTI) crude oil futures and spot prices are used to work out the hedge ratios and the measures of hedging effectiveness resulting from using the near-month contract and those resulting from the use of a more distant (6-month) contract. The results show that futures hedging is more effective when the near-month contract is used. They also reveal that hedge ratios are lower for near-month hedging. Some explanations are presented for these findings.

Suggested Citation

  • Ronald D. Ripple & Imad A. Moosa, 2007. "Hedging effectiveness and futures contract maturity: the case of NYMEX crude oil futures," Applied Financial Economics, Taylor & Francis Journals, vol. 17(9), pages 683-689.
  • Handle: RePEc:taf:apfiec:v:17:y:2007:i:9:p:683-689
    DOI: 10.1080/09603100600722177
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    1. repec:eee:eneeco:v:63:y:2017:i:c:p:174-184 is not listed on IDEAS
    2. Lean, Hooi Hooi & McAleer, Michael & Wong, Wing-Keung, 2010. "Market efficiency of oil spot and futures: A mean-variance and stochastic dominance approach," Energy Economics, Elsevier, vol. 32(5), pages 979-986, September.
    3. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2011. "Crude oil hedging strategies using dynamic multivariate GARCH," Energy Economics, Elsevier, vol. 33(5), pages 912-923, September.
    4. Michael Ye & John Zyren & Joanne Shore & Thomas Lee, 2010. "Crude Oil Futures as an Indicator of Market Changes: A Graphical Analysis," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 16(3), pages 257-268, August.
    5. Caporin, Massimiliano & Jimenez-Martin, Juan-Angel & Gonzalez-Serrano, Lydia, 2013. "Currency hedging strategies, strategic benchmarks and the Global and Euro Sovereign financial crises," MPRA Paper 50940, University Library of Munich, Germany, revised 23 Oct 2013.
    6. Mara Madaleno & Carlos Pinho, 2010. "Hedging Performance and Multiscale Relationships in the German Electricity Spot and Futures Markets," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 3(1), pages 1-37, December.
    7. Turner, Peter A. & Lim, Siew Hoon, 2015. "Hedging jet fuel price risk: The case of U.S. passenger airlines," Journal of Air Transport Management, Elsevier, vol. 44, pages 54-64.
    8. Guglielmo Maria Caporale & Davide Ciferri & Alessandro Girardi, 2014. "Time-Varying Spot and Futures Oil Price Dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(1), pages 78-97, February.
    9. Caporin, Massimiliano & Jimenez-Martin, Juan-Angel & Gonzalez-Serrano, Lydia, 2014. "Currency hedging strategies in strategic benchmarks and the global and Euro sovereign financial crises," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 159-177.
    10. John Hua Fan & Eduardo Roca & Alexandr Akimov, 2010. "Hedging With Futures Contract: Estimation and Performance Evaluation of Optimal Hedge Ratios in the European Union Emissions Trading Scheme," Discussion Papers in Finance finance:201009, Griffith University, Department of Accounting, Finance and Economics.
    11. Асатуров К.Г. & Теплова Т.В., 2014. "Построение Коэффициентов Хеджирования Для Высоколиквидных Акций Российского Рынка На Основе Моделей Класса Garch," Журнал Экономика и математические методы (ЭММ), Центральный Экономико-Математический Институт (ЦЭМИ), vol. 50(1), pages 37-54, январь.
    12. repec:aen:journl:ej38-3-hanly is not listed on IDEAS
    13. Chang, Chia-Lin & González-Serrano, Lydia & Jimenez-Martin, Juan-Angel, 2013. "Currency hedging strategies using dynamic multivariate GARCH," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 94(C), pages 164-182.
    14. repec:eee:eneeco:v:63:y:2017:i:c:p:92-105 is not listed on IDEAS
    15. Cotter, John & Hanly, Jim, 2015. "Performance of utility based hedges," Energy Economics, Elsevier, vol. 49(C), pages 718-726.
    16. repec:kap:iaecre:v:16:y:2010:i:3:p:257-268 is not listed on IDEAS
    17. Hilal, Sawsan & Poon, Ser-Huang & Tawn, Jonathan, 2011. "Hedging the black swan: Conditional heteroskedasticity and tail dependence in S&P500 and VIX," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2374-2387, September.

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