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Optimal hedging strategy with futures oil markets via FIEGARCH copula model

Optimal hedging strategy with futures oil markets via FIEGARCH copula model In this work, our aim is to evaluate the hedging strategies performance of a range of traditional methods such as one-to-one, MCO, and other methods based on GARCH models and copula theory, for two spot and futures energy markets: WTI crude oil and heating oil. We model dependence structure between spot and futures oil markets using copula theory that applied to bivariate standardised residuals data obtained from two fitted univariate FIEGARCH models. This procedure permits to simultaneously capture asymmetric non-linear behaviour, dependence structure, and long memory. We use this method with different copulas functions (Joe, Frank, bb1, Gumbel, Gaussian and dynamic) to investigate hedging performance and the efficiency of copula methods in risk reduction and return improvement. The empirical results show that the combination of the FIEGARCH model and Joe copula is the best hedging strategy for both indices, because it gives the (H/E) ratio the lowest. Also the results show that the dynamic copula does not improve the results found by other strategies. Keywords: hedge against financial risks; future contract; hedge ratio; optimal hedging strategy; FIEGARCH; dynamic copula. Reference to this paper should be made as follows: Ifa, D. and Ghorbel, A. (2015) ` via FIEGARCH copula http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Journal of Finance and Accounting Inderscience Publishers

Optimal hedging strategy with futures oil markets via FIEGARCH copula model

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Publisher
Inderscience Publishers
Copyright
Copyright © 2015 Inderscience Enterprises Ltd.
ISSN
1752-7767
eISSN
1752-7775
DOI
10.1504/AJFA.2015.072596
Publisher site
See Article on Publisher Site

Abstract

In this work, our aim is to evaluate the hedging strategies performance of a range of traditional methods such as one-to-one, MCO, and other methods based on GARCH models and copula theory, for two spot and futures energy markets: WTI crude oil and heating oil. We model dependence structure between spot and futures oil markets using copula theory that applied to bivariate standardised residuals data obtained from two fitted univariate FIEGARCH models. This procedure permits to simultaneously capture asymmetric non-linear behaviour, dependence structure, and long memory. We use this method with different copulas functions (Joe, Frank, bb1, Gumbel, Gaussian and dynamic) to investigate hedging performance and the efficiency of copula methods in risk reduction and return improvement. The empirical results show that the combination of the FIEGARCH model and Joe copula is the best hedging strategy for both indices, because it gives the (H/E) ratio the lowest. Also the results show that the dynamic copula does not improve the results found by other strategies. Keywords: hedge against financial risks; future contract; hedge ratio; optimal hedging strategy; FIEGARCH; dynamic copula. Reference to this paper should be made as follows: Ifa, D. and Ghorbel, A. (2015) ` via FIEGARCH copula

Journal

American Journal of Finance and Accounting – Inderscience Publishers

Published: Jan 1, 2015

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