Crude Oil Hedging Strategies Using Dynamic Multivariate GARCH

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

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: The paper examines the performance of four multivariate volatility models, namely CCC, VARMA-GARCH, DCC and 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 and 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 DCC (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)
JEL-codes: C22 C32 G11 G17 G32 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2010-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Crude oil hedging strategies using dynamic multivariate GARCH (2011)
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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