The (De)Merits of Minimum-Variance Hedging: Application to the Crack Spread

Alexander, Carol; Prokopczuk, Marcel; Sumawong, Anannit

doi:10.2139/ssrn.1986047

Cited by 3 publications

(1 citation statement)

References 31 publications

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“…The relatively poor performance of the CCGARCH model may relate to an inability of GARCH models to handle large and frequent jumps in the basis as are typical for electricity markets. This has been found by other studies for even less volatile series such as oil (Alexander, Prokopczuk, & Sumawong, 2013) and equities (Cotter & Hanly, 2006). From these results, we conclude that an OLS model is perfectly adequate in that it provides the best chance of obtaining good hedging effectiveness.…”

Section: Hedging Effectivenesssupporting

confidence: 85%

The efficacy of financial futures as a hedging tool in electricity markets

Hanly

Morales²,

Cassells

2018

Int. J Fin Econ

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This paper estimates and applies a risk management strategy for electricity spot exposures using futures hedging. We apply our approach to 3 of the most actively traded European electricity markets, Nordpool, APXUK, and Phelix. We compare both optimal hedging strategies and the hedging effectiveness of these markets for 2 hedging horizons, weekly and monthly using both Variance and Value at Risk. Our key finding is that electricity futures can effectively manage risk only for specific time periods when using hedging strategies that have been very successful in financial and other commodity markets. More generally, they are ineffective as a risk management tool when compared with other energy assets. This is especially true at the weekly frequency. We also find significant differences in both the optimal hedge ratios and the hedging effectiveness of the different electricity markets. Better performance is found for the Nordpool market, whereas the poorest performer in hedging terms is the Phelix market.

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Section: Hedging Effectivenesssupporting

confidence: 85%