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Futures hedging effectiveness under the segmentation of bear/bull energy markets

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  • Chang, Chiao-Yi
  • Lai, Jing-Yi
  • Chuang, I-Yuan

Abstract

This article undertakes eight hedging models (Regression, MD-GARCH, BEKK-GARCH, CCC-GARCH, ECM-MD, ECM-BEKK, ECM-CCC, and state space models) to investigate hedging effectiveness of different price scenarios in energy futures markets. Different models have systematically evidenced that hedging effectiveness is higher in an increasing pattern (termed "bull markets") than in a decreasing pattern (termed "bear markets") for crude oil and gasoline futures. That is, findings show asymmetric hedging performance between upward and downward price trends consistently from the most popular hedging models in literature. Out-of-sample examination also suggests that the ranking of hedging effectiveness of different hedging models is not parallel in different price patterns across futures contracts, implying that investors should adjust their hedging strategies accordingly.

Suggested Citation

  • Chang, Chiao-Yi & Lai, Jing-Yi & Chuang, I-Yuan, 2010. "Futures hedging effectiveness under the segmentation of bear/bull energy markets," Energy Economics, Elsevier, vol. 32(2), pages 442-449, March.
    • Handle: RePEc:eee:eneeco:v:32:y:2010:i:2:p:442-449
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