Analysis of the Dynamic Optimal Hedging Ratio and its Effectiveness by M-GARCH Models: A Case Study for Iran Crude Oil Spot Price

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SAYADI MOHAMMAD; EBRAHIMI MOHSEN; Jashni Pegah

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Journal: Journal of Economic Research and Policies Year:2019 | Volume:27 | Issue:91 Page(s): 359-395

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Title

Analysis of the Dynamic Optimal Hedging Ratio and its Effectiveness by M-GARCH Models: A Case Study for Iran Crude Oil Spot Price

Author(s)

SAYADI MOHAMMAD | EBRAHIMI MOHSEN | Jashni Pegah | Issue Writer Certificate

Keywords

Optimal Hedging RatioQ1

Spot PriceQ2

M-GARCHQ1

Futures MarketQ1

EffectivenessQ1

Abstract

Hedging the risk of crude oil prices fluctuation for countries such as Iran that are highly dependent on oil export earnings is one of the important subject to discuss. In this regard, the main purpose of this study is to calculate and analyze the optimal dynamic hedging ratio for Iranian light and heavy crude oil Spot Prices based on one-month to four-month cross hedge contracts in New York Stock Exchange (NYMEX) futures using DCC-GARCH, CCC-GARCH, and BEKK-GARCH approaches. For estimation of the optimal dynamic hedge ratio, we use daily light and heavy crude oil Spot Prices and WTI futures from January 1985 to December 2017. We found that by using longer maturity contracts, the optimal hedge ratio for dynamic models will increase for both light and heavy crude oil Spot Prices. Also, by using various multivariate GARCH models and comparing them, we find that for Iranian light and heavy crude oil, the most reduction in portfolio risk is for one-month contracts by using BEKK-GARCH model; so we can reduce the risk of Iranian light and heavy crude oil price volatility by hedging the risk of one-month future contract, respectively up to 47/79 and 35/19 percent. The findings show the benefits of using future markets for hedging risk of crude oil price volatility for Iran after Removing the current financial barriers and restrictions caused by sanctions.

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APA: Copy

SAYADI, MOHAMMAD, EBRAHIMI, MOHSEN, & Jashni, Pegah. (2019). Analysis of the Dynamic Optimal Hedging Ratio and its Effectiveness by M-GARCH Models: A Case Study for Iran Crude Oil Spot Price. JOURNAL OF ECONOMIC RESEARCH AND POLICIES, 27(91 ), 359-395. SID. https://sid.ir/paper/363522/en

Vancouver: Copy

SAYADI MOHAMMAD, EBRAHIMI MOHSEN, Jashni Pegah. Analysis of the Dynamic Optimal Hedging Ratio and its Effectiveness by M-GARCH Models: A Case Study for Iran Crude Oil Spot Price. JOURNAL OF ECONOMIC RESEARCH AND POLICIES[Internet]. 2019;27(91 ):359-395. Available from: https://sid.ir/paper/363522/en

IEEE: Copy

MOHAMMAD SAYADI, MOHSEN EBRAHIMI, and Pegah Jashni, “Analysis of the Dynamic Optimal Hedging Ratio and its Effectiveness by M-GARCH Models: A Case Study for Iran Crude Oil Spot Price,” JOURNAL OF ECONOMIC RESEARCH AND POLICIES, vol. 27, no. 91 , pp. 359–395, 2019, [Online]. Available: https://sid.ir/paper/363522/en

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