Title: Optimal hedging strategy with futures oil markets via FIEGARCH copula model

Authors: Dhoifli Ifa; Ahmed Ghorbel

Addresses: Faculté des sciences économiques et de Gestion, Université de Sfax, B.P. 954, 3018 Sfax, Tunisia ' Faculté des sciences économiques et de Gestion, Université de Sfax, B.P. 954, 3018 Sfax, Tunisia

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: hedging strategy; oil futures markets; oil spot markets; oil markets; financial risks; future contracts; hedge ratio; optimisation; FIEGARCH; dynamic copula.

DOI: 10.1504/AJFA.2015.072596

American Journal of Finance and Accounting, 2015 Vol.4 No.2, pp.151 - 171

Received: 08 Jul 2015
Accepted: 20 Jul 2015
Published online: 21 Oct 2015 *

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