Price volatility, hedging and variable risk premium in the crude oil market
The crude oil price exhibits a high degree of volatility which varies significantly over time. Such characteristics imply that the oil market is a promising area for testing volatility models. Testing and predicting volatility using ARCH and GARCH models have grown in the literature. A useful applic...
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| Veröffentlicht in: | OPEC review 2006-06, Vol.30 (2), p.55-70 |
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| container_title | OPEC review |
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| creator | Jalali-Naini, Ahmad R. Manesh, Maryam Kazemi |
| description | The crude oil price exhibits a high degree of volatility which varies significantly over time. Such characteristics imply that the oil market is a promising area for testing volatility models. Testing and predicting volatility using ARCH and GARCH models have grown in the literature. A useful application of the volatility models is in the formulation of hedging strategies. In this paper we compare the optimal hedge ratio for the crude oil using the classical minimum risk approach and use ARCH to incorporate the effect of heteroskedasticity in the residuals on the hedge ratio. In addition, we test for the existence of a variable risk premium in the crude oil market. We find that, assuming rational expectations, there is a non‐zero risk premium. We test for the variability of the risk premia and find evidence in its support when we employed a multivariate GARCH model. |
| doi_str_mv | 10.1111/j.1468-0076.2006.00161.x |
| format | Article |
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Such characteristics imply that the oil market is a promising area for testing volatility models. Testing and predicting volatility using ARCH and GARCH models have grown in the literature. A useful application of the volatility models is in the formulation of hedging strategies. In this paper we compare the optimal hedge ratio for the crude oil using the classical minimum risk approach and use ARCH to incorporate the effect of heteroskedasticity in the residuals on the hedge ratio. In addition, we test for the existence of a variable risk premium in the crude oil market. We find that, assuming rational expectations, there is a non‐zero risk premium. 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Modelling</subject><subject>Oil</subject><subject>Petroleum</subject><subject>Prices</subject><subject>Risk</subject><subject>Risk premiums</subject><subject>Stochastic models</subject><subject>Studies</subject><subject>Testing</subject><subject>Volatility</subject><issn>0277-0180</issn><issn>1753-0229</issn><issn>1468-0076</issn><issn>1753-0237</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2006</creationdate><recordtype>article</recordtype><sourceid>7TQ</sourceid><recordid>eNqNkEFP3DAQha2qlbql_AerUjk1wY6T2HvooVoBLUXAAejRmtgT8OJNFjuB3X9fh0Ug9dS5zEh-7834I4RylvNUh8ucl7XKGJN1XjBW54zxmuebd2T2-vCezFghZca4Yh_JpxiXLNVcyBn5fRmcQfrYexicd8P2G71De-u6WwqdpY8QHDQeaXDxnq4Drty4oq6jwx1SE0aLtHeeriDc4_CZfGjBR9x_6Xvk-vjoavEzO7s4-bX4cZaZUnCeoVWSGylZ0SBwFBaUaiVYzucWGkRRylZVLSiDXDZNUxYAVQm2VtYyO2_EHjnY5a5D_zBiHPTKRYPeQ4f9GDWfCyYqIZLwyz_CZT-GLt2mC1YVdVGrKonUTmRCH2PAVq-DSx_aas70hFgv9URSTyT1hFg_I9abZP36kg_RgG8DdMbFN79UaQGb7vi-0z05j9v_ztcXl0eLNCV_tvO7OODm1Z-g61oKWek_5ye6LE4X5_LmVJfiL4qmni8</recordid><startdate>200606</startdate><enddate>200606</enddate><creator>Jalali-Naini, Ahmad R.</creator><creator>Manesh, Maryam Kazemi</creator><general>Blackwell Publishing Ltd</general><general>Blackwell</general><scope>BSCLL</scope><scope>IQODW</scope><scope>AAYXX</scope><scope>CITATION</scope><scope>7ST</scope><scope>7TA</scope><scope>7TN</scope><scope>7TQ</scope><scope>8BJ</scope><scope>8FD</scope><scope>C1K</scope><scope>DHY</scope><scope>DON</scope><scope>F1W</scope><scope>FQK</scope><scope>H96</scope><scope>JBE</scope><scope>JG9</scope><scope>L.G</scope><scope>SOI</scope><scope>7U1</scope><scope>7U2</scope></search><sort><creationdate>200606</creationdate><title>Price volatility, hedging and variable risk premium in the crude oil market</title><author>Jalali-Naini, Ahmad R. ; Manesh, Maryam Kazemi</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c4311-ed871c7702bea1e3da88f7ad119dabee347f85fa8ce17bbb42aa54ad68dd0d9b3</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2006</creationdate><topic>Applied sciences</topic><topic>Arches</topic><topic>Autoregressive models</topic><topic>Comparative analysis</topic><topic>Crude oil</topic><topic>Crude oil prices</topic><topic>Economic data</topic><topic>Energy</topic><topic>Energy economics</topic><topic>Exact sciences and technology</topic><topic>Expectations</topic><topic>Fossil fuels and derived products</topic><topic>General, economic and professional studies</topic><topic>Hedging</topic><topic>International markets</topic><topic>Markets</topic><topic>Measures of variability</topic><topic>Methodology. 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| ispartof | OPEC review, 2006-06, Vol.30 (2), p.55-70 |
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| language | eng |
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| source | Wiley Online Library Journals Frontfile Complete; PAIS Index; Business Source Complete |
| subjects | Applied sciences Arches Autoregressive models Comparative analysis Crude oil Crude oil prices Economic data Energy Energy economics Exact sciences and technology Expectations Fossil fuels and derived products General, economic and professional studies Hedging International markets Markets Measures of variability Methodology. Modelling Oil Petroleum Prices Risk Risk premiums Stochastic models Studies Testing Volatility |
| title | Price volatility, hedging and variable risk premium in the crude oil market |
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