Minimum variance hedging with bivariate regime-switching model for WTI crude oil

Jui-Cheng Hung, Yi-Hsien Wang,, Matthew C. Chang, Kuang-Hsun Shih and Hsiu-Hsueh Kao,

Energy, 2011, vol. 36, issue 5, 3050-3057

Abstract: This paper proposes a four-regime bivariate Markov regime-switching model to estimate the daily time-varying minimum variance hedge ratios for West Texas Intermediate (WTI) crude oil, and evaluates its in- and out-of-sample hedging performances with two-regime model, CC-GARCH, TVC-GARCH, and OLS models. Empirical results reveal that the four-regime Markov switching model outperforms the other models for both in- and out-of-sample hedging performance. Based on Hansen’s SPA test (2005), the four-regime model significantly outperforms the other models for only in-sample hedging.

Keywords: Four-regime bivariate Markov switching model; TVC-GARCH; In- and out-of-sample hedging performances; SPA test (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:36:y:2011:i:5:p:3050-3057

DOI: 10.1016/j.energy.2011.02.049

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