 Exploiting the sentiments: A simple approach for improving cross hedging effectivenessZhiyuan Pan, Ziqian Fu, Yudong Wang and Qingma Dong Energy Economics, 2024, vol. 134, issue C Abstract: This paper introduces a novel hedging strategy based on textual information for cross-hedging. The strategy allows the optimal hedge ratio to vary with the sentiment extracted from online oil news, leading to an improvement in cross-hedging effectiveness. We find that the sentiment hedging strategy outperforms traditional time-varying and static hedging strategies in both in-sample and out-of-sample scenarios, with statistical and economic significance. This superior performance benefits from the well-documented predictive power of sentiment on futures volatility. Furthermore, we confirm an asymmetric effect of sentiment on hedging effectiveness, with negative sentiment having a greater impact on hedge ratios. Finally, extreme sentiment can trade off the negative relationship between volatile hedge ratios and hedging performance, potentially leading to superior hedging performance compared to normal sentiment, which is robust when considering transaction costs. Our findings highlight the importance of sentiment for estimating the optimal hedge ratio and should be considered for risk management. Keywords: News sentiment; Cross hedge; Topic model (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:134:y:2024:i:c:s0140988324003013 DOI: 10.1016/j.eneco.2024.107593 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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