Abstract
AbstractThis chapter considers futures strategies to hedge against spot price fluctuations. The ratio of futures positions to a spot position that minimizes the volatility of the portfolio return, which consists of a spot and its futures, defined as the optimal hedge ratio (OHR), is the covariance of the spot and futures return series divided by the variance of the futures return series. We introduce some multivariate generalized autoregressive conditional heteroscedasticity (GARCH) models to estimate conditional covariance and variance. As an empirical analysis, we consider a hedging strategy with futures contracts in the United States (US) and United Kingdom (UK) natural gas markets. We calculate the OHR and hedging effectiveness index after estimating three types of bivariate GARCH models (i.e., the diagonal VECH model, diagonal BEKK model, and constant conditional correlation (CCC) model). The results indicate that the portfolio constructed on the OHR calculated by the diagonal BEKK model has the best hedging effect in the US and UK markets.KeywordsNatural gasFutureMultivariate GARCHOptimal hedge ratioHedge effectiveness
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