A Dynamic Hedging Approach for Refineries in Multiproduct Oil Markets

Energy, 36(2): 881-887.

19 Pages Posted: 5 Jul 2016 Last revised: 7 Jul 2016

See all articles by Qiang Ji

Qiang Ji

Chinese Academy of Sciences (CAS) - Institute of Policy and Management

Ying Fan

Chinese Academy of Sciences - Institute of Policy and Management - Center for Energy and Environmental Policy Research

Date Written: 2011

Abstract

A multiproduct portfolio hedge ratio strategy for oil futures is investigated using a multivariate GARCH model based on dynamic conditional correlation and an error correction model (DCC-ECM-MVGARCH). By considering the characteristics of refiner profits from crack spread and the mutual relations among crude oil, gasoline and heating oil spot and future prices, we estimate the time-varying optimal hedge ratios for the oil-cracking margin. In addition, a naïve strategy, a traditional OLS model and dynamic BGARCH model are selected to compare with our model for hedge effectiveness. Comparison of hedge effectiveness for in-sample and out-of-sample data reveals that the dynamic DCC-ECM-MVGARCH model is more sensitive to market fluctuations, provides a more accurate description of changes in volatility and has more advantages than other models. Therefore, the empirical results prove that application of the DCC-ECM-MVGARCH model for hedging of oil market portfolio can play an important role in avoiding the double risk of crude oil and oil product markets for refineries.

Keywords: Hedge;GARCH;Dynamic conditional correlation

Suggested Citation

Ji, Qiang and Fan, Ying, A Dynamic Hedging Approach for Refineries in Multiproduct Oil Markets (2011). Energy, 36(2): 881-887., Available at SSRN: https://ssrn.com/abstract=2804467

Qiang Ji (Contact Author)

Chinese Academy of Sciences (CAS) - Institute of Policy and Management ( email )

No.15 ZhongGuanCun BeiYiTiao Alley
Haidian District
Beijing, 100190
China

Ying Fan

Chinese Academy of Sciences - Institute of Policy and Management - Center for Energy and Environmental Policy Research ( email )

52 Sanlihe Rd.
Datun Road, Anwai
Beijing, Xicheng District 100864
China

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