Futures hedging in crude oil markets: A comparison between minimum-variance and minimum-risk frameworks

Abstract

Most of existing studies on crude oil futures hedging aim to minimizing the variance of hedged portfolio. In this paper, we evaluate the hedging performance in a different framework of minimum-risk and try to find the optimal hedge model. We employ a total of ten popular econometric specifications including three constant and seven dynamic hedge ratio models. Our results suggest that none of the models of interest can outperform all competitors in or out of sample for all futures contracts. The constant hedge ratio models perform better than the dynamic hedge ratio models under the min-V framework, but the situation overturns under the min-R framework with the DCC-GARCH performs best. More importantly, the equal-weighted combination of all constant and dynamic hedge ratios results in better out-of-sample performance than the combination of either type of hedge ratios only.