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Contribution of Exchange Traded Funds in Hedging Crude Oil Price Risk

Author

Listed:
  • Shrestha, Keshab

    (Monash University Malaysia)

  • Philip, Sheena Sara Suresh

    (Monash University Malaysia)

  • Peranginangin, Yessy

    (Monash University Indonesia)

Abstract

In this study, we empirically analyze the contributions of three crude oil-based exchange traded funds (ETFs) and the futures contract in hedging crude oil price risk. In order to measure hedging contributions of ETFs, we estimate the usual minimum variance hedge ratios as well as the quantile based minimum variance hedge ratios based on three different methods. We also compute the hedging effectiveness of the futures contract and three ETFs. We find that ETFs can be used as hedging instruments especially for the longer hedging horizons and extreme quantiles. However, overall, we find the futures contract to be the most effective instrument for hedging.

Suggested Citation

  • Shrestha, Keshab & Philip, Sheena Sara Suresh & Peranginangin, Yessy, 2023. "Contribution of Exchange Traded Funds in Hedging Crude Oil Price Risk," American Business Review, Pompea College of Business, University of New Haven, vol. 26(1), pages 203-225, May.
    • Handle: RePEc:ris:ambsrv:0077
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    File URL: https://digitalcommons.newhaven.edu/americanbusinessreview/vol26/iss1/10/
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    More about this item

    Keywords

    Price Discovery; Information Share; Quantile Hedge Ratio; Exchange Traded Funds;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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