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Optimal Hedging Strategies for Natural Gas

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  • Changfeng Zhou
  • Huan Cai

Abstract

This study examines the optimal hedge performance between natural gas market and crude oil, ECO, gold and US-bonds markets. To calculate optimal hedge ratios and hedging effectiveness, we apply several multivariate volatility models, namely CCC, DCC, cDCC and bayesDCC. The empirical results show that crude oil is the best asset to hedge natural gas followed by gold and ECO. This is a new result relative to the existing literature on natural gas prices. Additionally, we find that the bayesDCC model has the best performance on optimal hedge ratios (OHRs) calculation in terms of hedging effectiveness. Our findings will hold important financial risk management implications and asset portfolio for those invest in natural gas market.

Suggested Citation

  • Changfeng Zhou & Huan Cai, 2020. "Optimal Hedging Strategies for Natural Gas," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(8), pages 1-1, August.
    • Handle: RePEc:ibn:ijefaa:v:12:y:2020:i:8:p:1
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    References listed on IDEAS

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    1. Nick, Sebastian & Thoenes, Stefan, 2014. "What drives natural gas prices? — A structural VAR approach," Energy Economics, Elsevier, vol. 45(C), pages 517-527.
    2. Gian Piero Aielli, 2013. "Dynamic Conditional Correlation: On Properties and Estimation," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(3), pages 282-299, July.
    3. Wang, TianTian & Zhang, Dayong & Clive Broadstock, David, 2019. "Financialization, fundamentals, and the time-varying determinants of US natural gas prices," Energy Economics, Elsevier, vol. 80(C), pages 707-719.
    4. van Goor, Harm & Scholtens, Bert, 2014. "Modeling natural gas price volatility: The case of the UK gas market," Energy, Elsevier, vol. 72(C), pages 126-134.
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    Cited by:

    1. Živkov, Dejan & Balaban, Suzana & Simić, Milica, 2024. "Hedging gas in a multi-frequency semiparametric CVaR portfolio," Research in International Business and Finance, Elsevier, vol. 67(PA).

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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