Determinants and real effects of joint hedging: An empirical analysis of the US petroleum industry

Georges Dionne (), Rayane El Hraiki () and Mohamed Mnasri ()
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Rayane El Hraiki: HEC Montreal, Canada Research Chair in Risk Management
Mohamed Mnasri: HEC Montreal, Canada Research Chair in Risk Management

No 22-4, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: We study the intensity of joint hedging of oil and gas prices by US petroleum firms. We aim to explain the rationale for and find the determinants of joint hedging, as well as its impact on firm market value, performance, and riskiness. Joint hedging that takes into account the interdependence between risks should have a positive impact on firm value in the presence of multiple risks. We verify this theory in an innovative way, by testing the effects of hedging oil and gas prices simultaneously and by using an instrumental variable framework to attenuate the problem of endogeneity between firm value and risk management. We find evidence of higher market value, higher performance, and lower riskiness for firms with a high propensity to jointly hedge their oil and gas production to a greater extent. We show that joint hedging dominates single-commodity hedging.

Keywords: Joint hedging; enterprise risk management; oil price; gas price; hedging intensity; bivariate probit; causality; firm value (search for similar items in EconPapers)
JEL-codes: C13 C23 C25 G23 G32 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2022-08-23
New Economics Papers: this item is included in nep-ene and nep-rmg
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