Mean-variance hedging with oil futures |
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| Authors: | Liao Wang Johannes Wissel |
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| Affiliation: | 1. Industrial Engineering and Operations Research Department, Columbia University, 500 West 120th Street, New York, NY, 10027, USA
2. School of Operations Research and Information Engineering, Cornell University, 274 Rhodes Hall, Ithaca, NY, 14853, USA
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| Abstract: | We analyze mean-variance-optimal dynamic hedging strategies in oil futures for oil producers and consumers. In a model for the oil spot and futures market with Gaussian convenience yield curves and a stochastic market price of risk, we find analytical solutions for the optimal trading strategies. An implementation of our strategies in an out-of-sample test on market data shows that the hedging strategies improve long-term return-risk profiles of both the producer and the consumer. |
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