Dealing with tail risk in energy commodity markets: Futures contracts versus exchange-traded funds

Panit Arunanondchai, Kunlapath Sukcharoen and David J. Leatham

Journal of Commodity Markets, 2020, vol. 20, issue C

Abstract: The emergence of energy commodity exchange-traded fund (ETFs) has provided an alternative vehicle for both energy commodity users (long hedgers) and producers (short hedgers) to hedge their respective exposures to unfavorable commodity energy price movements without opening a relatively expensive futures account. This paper examines the usefulness of ETFs in dealing with tail risk in crude oil, gasoline, heating oil, and natural gas markets by analyzing the out-of-sample hedging effectiveness of ETFs and comparing their performance with those of the futures counterparts. The empirical distribution method and kernel copula method are applied to estimate the minimum-Value at Risk (VaR) and minimum-Expected Shortfall (ES) hedge ratios for both long and short hedgers. Our results indicate that the futures contract is a better hedging instrument for hedging tail risk in the crude oil and heating oil markets whereas the ETF provides better downside risk protection in the gasoline and natural gas markets.

Keywords: Energy hedging; ETF hedging; Futures hedging; Kernel copulas; Tail risk (search for similar items in EconPapers)
JEL-codes: C53 G11 G17 G32 Q40 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:20:y:2020:i:c:s2405851319300777

DOI: 10.1016/j.jcomm.2019.100112

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