On the Market Timing of Hedging: Evidence from U.S. Oil and Gas Producers

Forthcoming at Review of Quantitative Finance and Accounting

55 Pages Posted: 3 Oct 2019

See all articles by Liu Hong

Liu Hong

affiliation not provided to SSRN

Yongjia Li

Boise State University - College of Business and Economics, Department of Finance

Kangzhen Xie

Seton Hall University, Stillman School of Business

Claire J. Yan

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: February 13, 2019

Abstract

Using a hand-collected data, we provide evidence of extensive use of commodity derivative in hedging among U.S oil and gas producers. We find large variations in hedging intensity and hedging profits while on average they generate significant positive profits. The profits relate positively to the intensity of hedging. We further decompose the hedge ratio into two components: the pure hedging component and the market timing component. We find that the hedging profits relate strongly and positively to the market timing component. We also identify a group of firms that can consistently generate profits from their hedging activities. Among firms who actively change their hedging positions, the winners tend to be larger firms. The hedging outcome does not increase equity beta while the pure hedging component tends to decrease equity beta. The positive profits are exclusive for the commodity derivative transactions of the oil and gas producers, while they do not profit from their interest rate or foreign exchange derivative transactions.

Keywords: risk management, hedging, derivative, market timing

JEL Classification: G32, G11, G14

Suggested Citation

Hong, Liu and Li, Yongjia and Xie, Kangzhen and Yan, Claire J., On the Market Timing of Hedging: Evidence from U.S. Oil and Gas Producers (February 13, 2019). Forthcoming at Review of Quantitative Finance and Accounting, Available at SSRN: https://ssrn.com/abstract=3333502 or http://dx.doi.org/10.2139/ssrn.3333502

Liu Hong

affiliation not provided to SSRN

Yongjia Li

Boise State University - College of Business and Economics, Department of Finance ( email )

1910 University Drive
Boise, ID 83716
United States

Kangzhen Xie (Contact Author)

Seton Hall University, Stillman School of Business ( email )

South Orange, NJ 07079
United States

Claire J. Yan

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

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