Crude oil hedging strategy: new evidence from the data of the financial crisis

Yuki Toyoshima (), Tadahiro Nakajima and Shigeyuki Hamori

Applied Financial Economics, 2013, vol. 23, issue 12, 1033-1041

Abstract: This article examines the performance of three multivariate conditional volatility models with respect to crude oil spot and futures returns: the Dynamic Conditional Correlation (DCC) model, Asymmetric Dynamic Conditional Correlation (A-DCC) model and Diagonal Baba-Engle-Kraft-Kroner (Diagonal BEKK) model. Moreover, the article proposes using the time-varying optimal hedge ratio (OHR) to build a hedging strategy in the market, taking advantage of these multivariate conditional volatility models. We employ daily spot and futures data from the West Texas Intermediate (WTI) oil market from 3 January 2007 to 30 December 2011. Variance of portfolios and hedging effectiveness index show that the performance in terms of reducing variance is good in order of A-DCC, DCC and Diagonal-BEKK.

Date: 2013
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DOI: 10.1080/09603107.2013.788779

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