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Dynamic Hedging Strategies: An Application to the Crude Oil Market

Lautier, Delphine; Galli, Alain (2010), Dynamic Hedging Strategies: An Application to the Crude Oil Market, The Review of Futures Markets, 19, 1, p. 7-41

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Type
Article accepté pour publication ou publié
Date
2010
Journal name
The Review of Futures Markets
Volume
19
Number
1
Publisher
Institute for Financial Markets
Pages
7-41
Metadata
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Author(s)
Lautier, Delphine
Galli, Alain
Abstract (EN)
This article analyzes long-term dynamic hedging strategies relying on term structure models of commodity prices and proposes a new way to calibrate the models which takes into account the error associated with the hedge ratios. Different strategies, with maturities up to seven years, are tested on the American crude oil futures market. The study considers three recent and efficient models respectively with one, two, and three factors. The continuity between the models makes it possible to compare their performances, which are judged on the basis of the errors associated with a delta hedge. The strategies are also tested for their sensitivity to the maturities of the positions and to the frequency of the portfolio rollover. We found that our method gives the best of two seemingly incompatible worlds: the higher liquidity of short-term futures contracts for the hedge portfolios, together with markedly improved performances. Moreover, even if it is more complex, the three-factor model is by far, the best.
Subjects / Keywords
Dynamic Hedging; Commodities; Futures; Long-term commitment; Calibration
JEL
Q49 - Other
C52 - Model Evaluation, Validation, and Selection
C13 - Estimation: General
G13 - Contingent Pricing; Futures Pricing

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