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Hedgers, Investors and Futures Return Volatility: the Case of NYMEX Crude Oil

Author

Listed:
  • George Milunovich

    () (Department of Economics, Macquarie University)

  • Ronald D. Ripple

    () (Department of Economics, Macquarie University)

Abstract

We present a new model to evaluate the volatility of futures returns. The model is a combination of Dynamic Conditional Correlation and an augmented EGARCH, which allows us to evaluate the differential effects of the trading activity of two classes of optimizing traders. We apply the model to the NYMEX crude oil futures contract, and we find that the rebalancing activity of hedgers has a significant and positive effect on returns volatility. However, we also find that the rebalancing activity attributable to crude oil futures for non-hedging investors has no significant effect.

Suggested Citation

  • George Milunovich & Ronald D. Ripple, 2006. "Hedgers, Investors and Futures Return Volatility: the Case of NYMEX Crude Oil," Research Papers 0607, Macquarie University, Department of Economics.
  • Handle: RePEc:mac:wpaper:0607
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    File URL: http://www.econ.mq.edu.au/research/2006/07Milunovich-Ripple-Hedgers.pdf
    File Function: First Version, 2006
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    More about this item

    Keywords

    portfolio choice; WTI oil volatility; optimal hedge ratio; dynamic conditional correlation;

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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