Abstract
A multiproduct portfolio hedge ratio strategy for oil futures is investigated using a multivariate GARCH model based on dynamic conditional correlation and an error correction model (DCC-ECM-MVGARCH). By considering the characteristics of refiner profits from crack spread and the mutual relations among crude oil, gasoline and heating oil spot and future prices, we estimate the time-varying optimal hedge ratios for the oil-cracking margin. In addition, a naïve strategy, a traditional OLS model and dynamic B-GARCH model are selected to compare with our model for hedge effectiveness. Comparison of hedge effectiveness for in-sample and out-of-sample data reveals that the dynamic DCC-ECM-MVGARCH model is more sensitive to market fluctuations, provides a more accurate description of changes in volatility and has more advantages than other models. Therefore, the empirical results prove that application of the DCC-ECM-MVGARCH model for hedging of oil market portfolio can play an important role in avoiding the double risk of crude oil and oil product markets for refineries.
| Original language | English |
|---|---|
| Pages (from-to) | 881-887 |
| Number of pages | 7 |
| Journal | Energy |
| Volume | 36 |
| Issue number | 2 |
| DOIs | |
| State | Published - Feb 2011 |
| Externally published | Yes |
UN SDGs
This output contributes to the following UN Sustainable Development Goals (SDGs)
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SDG 7 Affordable and Clean Energy
Keywords
- Dynamic conditional correlation
- GARCH
- Hedge
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