publication . Article . 2008

A Markov regime switching approach for hedging energy commodities

Amir H. Alizadeh; Nikos K. Nomikos; Panos K. Pouliasis;
  • Published: 02 Jan 2008 Journal: Journal of Banking & Finance, volume 32, pages 1,970-1,983 (issn: 0378-4266, Copyright policy)
  • Publisher: Elsevier BV
Abstract This paper estimates constant and dynamic hedge ratios in the New York Mercantile Exchange oil futures markets and examines their hedging performance. We also introduce a Markov regime switching vector error correction model with GARCH error structure. This specification links the concept of disequilibrium with that of uncertainty (as measured by the conditional second moments) across high and low volatility regimes. Overall, in and out-of-sample tests indicate that state dependent hedge ratios are able to provide significant reduction in portfolio risk.
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