Optimal dynamic hedging strategy with futures oil markets via FIEGARCH-EVT copula models

Ahmed Ghorbel () and Abdelwahed Trabelsi

International Journal of Managerial and Financial Accounting, 2012, vol. 4, issue 1, 1-28

Abstract: The goal of this paper is to evaluate the hedging strategies performance of a range of copula and traditional methods for three spot and futures oil markets: WTI crude oil, propane and heating oil. Our contribution is two-fold. First, we model dependence structure between spot and futures oil markets using copula theory applied to bivariate standardised residuals data obtained from two fitted univariate FIEGARCH models. To take in consideration the presence of extremes, we model residuals by a generalised Pareto distribution (GPD). This procedure permits to simultaneously capturing asymmetric non-linear behaviour, dependence structure, long memory and occurrence of extreme events. Second, we use this method with different Archimedean copulas functions (Joe, Frank, bb1, bb2, bb6, and Gumbel) to investigate hedging performance and the efficiency of copula methods in risk reduction and return improvement. Empirical results show that copulas methods perform better than tradition hedging strategies in terms of return and variance. bb6 copula provide the best performed hedge ratios for both WTI crude oil and propane markets while Frank copula prove effective risk reducers compared with other copulas and traditional methods for heating oil market.

Keywords: time-varying Archimedean copulas; optimal hedging strategy; long memory; volatility; extreme value theory; oil futures markets; accounting; spot markets; crude oil; propane; heating oil; copula theory; risk reduction; return improvement; bivariate standardised residuals. (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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