 Optimal hedging under biased energy futures marketsDolores Furió and Hipolit Torro Energy Economics, 2020, vol. 88, issue C Abstract: Optimal futures hedging positions for those agents trying to maximize their expected utility will depend on their view about the evolution of the market and on how risk adverse they are. The most risk adverse agents will probably decide to full-cover their positions. But when a futures bias exists, hedgers with moderate or low degree of risk aversion can alter their strategy depending on the expected gains in futures markets. In our application to the UK natural gas market, we find a statistically significant time-varying negative futures bias that can be forecasted with confidence. As a result of this bias, most effective and best performing hedging strategies for moderate risk-averse agents are those involving short (long) hedging in winter (summer) with a hedging ratio above (below) the minimum variance hedge ratio. These findings are of great interest to practitioners in the UK natural gas markets and the methodology can be extrapolated to other energy markets. Keywords: Futures hedging; Futures bias; Energy markets (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:88:y:2020:i:c:s014098832030089x DOI: 10.1016/j.eneco.2020.104750 Access Statistics for this article Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant More articles in Energy Economics from Elsevier |
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