Application of futures in calculating optimal hedge ratio in crude oil market: Comparison between static and dynamic approaches

Aleali, Simin; Abounoori, Abbas Ali; Emamverdi, Ghodratollah; Ghiasvand, Abolfazl

doi:10.22075/jem.2020.19144.1394

Application of futures in calculating optimal hedge ratio in crude oil market: Comparison between static and dynamic approaches

Document Type : Original Article

Authors

Simin Aleali ¹

Abbas Ali Abounoori ²

Ghodratollah Emamverdi ³

Abolfazl Ghiasvand ³

¹ Ph.D. Student of Economics, Department of Economics, Islamic Azad University,Central Tehran Branch

² Associate Professor of Economics, Department of Economics Islamic Azad University,Central Tehran Branch

³ Assistant Professor of Economics, Department of Economics Islamic Azad University,Central Tehran Branch

10.22075/jem.2020.19144.1394

Abstract

Futures are used as the most important risk hedge tools to reduce the risk of the crude oil market. The optimal hedging risk strategy is determined by calculating the optimal hedging risk ratio. It is important to determine the relationship between the time series of spot prices and futures in calculating the optimal hedging risk ratio. Therefore, in this paper, the OLS, ECM, DCC GARCH and GARCH models based on Copula are used to calculate and evaluate the optimal hedge ratio of spot market hedging risk to the futures market over the period 2018-2013. The results show that the DCC-GARCH model has the highest optimal hedging risk ratio at 0.805. Considering the percentage of variance reduction, it can be concluded that the dynamic strategies of DCC and copula to models Static hedging risk is more efficient. Also, the time-varying, t-student, gamble, and normal capsules show better performance than the DCC model. Also, among the functions mentioned above, the copula t student function has the best performance.

Keywords

Hedging Risk

Future contract

Minimum variance

Copula