A Markov regime switching approach for hedging energy commodities

A New Range-Based Regime-Switching Dynamic Conditional Correlation Model for Minimum-Variance Hedging

“…This setting of the degree of risk aversion is in line with Alizadeh and Nomikos [25] and Alizadeh et al [35]. 10 Engel [36] and Marsh [37] clarify that parameter instability may lead to differences between in-sample and out-of-sample performance.…”

“…So far, the use of variance as the proxy for risk has two flaws: trading position and the proxy chosen. It is necessary to discuss the hedging performance of different trading positions to compare hedging methods, as the short and long positions present different hedging performance (see for instance, Cotter and Hanly [38] and Alizadeh, et al [35]) 11 . Hedgers are concerned with negative losses; therefore, this study uses semi-variance as an alternative risk proxy to replace the variance variable.…”

Determinants of Corporate Hedging Practices in Malaysia

“…It is not surprising that most of the previous studies have focused predominantly on the firm's foreign currency risk (Hagelin 2003;Allayannis and Ofek, 2001;Géczy et al 1997), besides interest rate risk (Graham and Rogers, 2000;Carcano and Foresi, 1997;Mian 1996). And recently other market risks such as commodity risk, (see e.g., Lien and Yang, 2008;Alizadeh, Nomikos, and Pouliasis, 2008) and other non-financial risks such as information processing, technological, strategic and leadership risk (Linsley and Shrives, 2006) has become centre of attention. However, this empirical evidence regarding the choice of hedging instruments and determinants of foreign exchange risk hedging seems to reflect decision making of managers in the developed countries context which have found to have less information asymmetry, efficient market for corporate control, better institutional and legal systems.…”

Hedging Effectiveness in Energy Market during Economic Crisis: Better Way to Integration

“…Also, the ranking different hedging models' hedging effectiveness is not parallel in different price patterns across futures contracts which mean that investors should adjust their hedging strategies accordingly. Alizadeh et al (2008) estimated constant and dynamic hedge ratios in the New York Mercantile Exchange oil futures markets and examined their hedging performance. In and out-of-sample tests indicated that state dependent hedge ratios are able to provide significant reduction in portfolio risk.…”