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The optimal hedge strategy of crude oil spot and futures markets: Evidence from a novel method

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  • Lu‐Tao Zhao
  • Ya Meng
  • Yue‐Jun Zhang
  • Yun‐Tao Li

Abstract

Hedging is an important measure for investors to resist extreme risks and improve their profits. This paper develops a FIGARCH–EVT–copula–VaR model to derive hedge ratio when hedging crude oil spot and futures markets, overcoming the limitations of static models and simple dynamic models in existing literature. The empirical results indicate that the FIGARCH–EVT–copula–VaR model is superior to the other three commonly used models based on four criteria: mean of returns, variance of returns, ratio of mean to variance of returns, and hedging effectiveness. Comparatively, the new model has superior performance to other three models during the sample period and can be used by investors to obtain excellent hedging effect.

Suggested Citation

  • Lu‐Tao Zhao & Ya Meng & Yue‐Jun Zhang & Yun‐Tao Li, 2019. "The optimal hedge strategy of crude oil spot and futures markets: Evidence from a novel method," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 186-203, January.
  • Handle: RePEc:wly:ijfiec:v:24:y:2019:i:1:p:186-203
    DOI: 10.1002/ijfe.1656
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    File URL: https://doi.org/10.1002/ijfe.1656
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