Crude oil hedging strategies using dynamic multivariate GARCH

Chia-Lin Chang (), Michael McAleer and Roengchai Tansuchat ()

Energy Economics, 2011, vol. 33, issue 5, 912-923

Abstract: The paper examines the performance of several multivariate volatility models, namely CCC, VARMA-GARCH, DCC, BEKK and diagonal BEKK, for the crude oil spot and futures returns of two major benchmark international crude oil markets, Brent and WTI, to calculate optimal portfolio weights and optimal hedge ratios, and to suggest a crude oil hedge strategy. The empirical results show that the optimal portfolio weights of all multivariate volatility models for Brent suggest holding futures in larger proportions than spot. For WTI, however, DCC, BEKK and diagonal BEKK suggest holding crude oil futures to spot, but CCC and VARMA-GARCH suggest holding crude oil spot to futures. In addition, the calculated optimal hedge ratios (OHRs) from each multivariate conditional volatility model give the time-varying hedge ratios, and recommend to short in crude oil futures with a high proportion of one dollar long in crude oil spot. Finally, the hedging effectiveness indicates that diagonal BEKK (BEKK) is the best (worst) model for OHR calculation in terms of reducing the variance of the portfolio.

Keywords: Multivariate; GARCH; Conditional; correlations; Crude; oil; prices; Optimal; hedge; ratio; Optimal; portfolio; weights; Hedging; strategies (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (226)

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Related works:
Working Paper: Crude Oil Hedging Strategies Using Dynamic Multivariate GARCH (2010)
Working Paper: Crude Oil Hedging Strategies Using Dynamic Multivariate GARCH (2010)
Working Paper: Crude Oil Hedging Strategies Using Dynamic Multivariate GARCH (2010)
Working Paper: Crude Oil Hedging Strategies Using Dynamic Multivariate GARCH (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:33:y:2011:i:5:p:912-923

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