On the Market Timing of Hedging: Evidence from U.S. Oil and Gas Producers

Liu Hong (), Yongjia Li (), Kangzhen Xie () and Claire J. Yan ()
Additional contact information
Liu Hong: University of Arkansas
Yongjia Li: Boise State University
Kangzhen Xie: Seton Hall University
Claire J. Yan: Rutgers University

Review of Quantitative Finance and Accounting, 2020, vol. 54, issue 1, No 10, 297-334

Abstract: Abstract Using a hand-collected data, we provide evidence of extensive use of commodity derivative in hedging among U.S. oil and gas producers. We find large variations in hedging intensity and hedging profits while on average they generate significant positive profits. The profits relate positively to the intensity of hedging. We further decompose the hedge ratio into two components: the pure hedging component and the market timing component. We find that the hedging profits relate strongly and positively to the market timing component. We also identify a group of firms that can consistently generate profits from their hedging activities. Among firms who actively change their hedging positions, the winners tend to be larger firms. The hedging outcome does not increase equity beta while the pure hedging component tends to decrease equity beta. The positive profits are exclusive for the commodity derivative transactions of the oil and gas producers, while they do not profit from their interest rate or foreign exchange derivative transactions.

Keywords: Risk management; Hedging; Derivative; Market timing (search for similar items in EconPapers)
JEL-codes: G11 G14 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-019-00790-y

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