Ethanol Hedging Strategies Using Dynamic Multivariate GARCH
29 Pages Posted: 16 Nov 2016
Date Written: November 14, 2016
Ethanol has been the subject of intense debate following the adoption of the Energy Policy Act of 2005 (EPAct) which established that the gasoline supply in the United States (U.S.) must contain 10% ethanol. This work seeks to identify hedging ratios using dynamic multivariate GARCH to best identify hedging opportunities in a newly developed futures market. The ability for firms to hedge and regulators to supervise the ethanol futures market is crucial to both hedging potential losses and maintaining public access to the gasoline supply through ethanol pricing. Principal findings include the identification of price relationships between futures and spot prices of ethanol through multivariate GARCH. The construction of valid hedging portfolios also describes that the ethanol futures market has enough liquidity to be used for hedging on a routine basis. In addition, different portfolios using regional ethanol prices must be constructed to take advantage of the differences in prices in various regions.
Keywords: ethanol, DCC-GARCH, futures, energy
JEL Classification: C32, C58, G13, G18
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