Optimal futures hedging for energy commodities: An application of the GAS model |
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Authors: | Yingying Xu Donald Lien |
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Institution: | 1. School of Economics and Management, University of Science and Technology Beijing, Beijing, China;2. College of Business, University of Texas at San Antonio, San Antonio, Texas |
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Abstract: | This paper applies generalized autoregressive score-driven (GAS) models to futures hedging of crude oil and natural gas. For both commodities, the GAS framework captures the marginal distributions of spot and futures returns and corresponding dynamic copula correlations. We compare within-sample and out-of-sample hedging effectiveness of GAS models against constant ordinary least square (OLS) strategy and time-varying copula-based GARCH models in terms of volatility reduction and Value at Risk reduction. We show that the constant OLS hedge ratio is not inherently inferior to the time-varying alternatives. Nonetheless, GAS models tend to exhibit better hedging effectiveness than other strategies, particularly for natural gas. |
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Keywords: | copula energy asset futures GAS hedging score-driving |
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