University of Zagreb, Faculty of Economics and Business Zagreb
Abstract
Distinct from the existing literatures that most of them focussed on the case of a single change on issues related to structural change. This study addresses the practical advantage of hedging ratio when time varying structural breakings are considered. Data used in this study include daily observations of spot prices of WTI (Cushing, Oklahoma FOB), U.S. crude oil production, and futures closing prices of NYMEX over the period of 2002/1/2 ~ 2005/7/26. We compare on out-of-sample hedging effectiveness of this structural break with restricted VAR hedging model against standard VAR hedge model. It has been found that there are four structural breaks. And the improvement in hedging performance is clearly presented. Smaller hedging of a futures position can therefore reduce the investors cost extensively
