The paper examines the performance of four multivariate volatility models, namely CCC,
VARMA-GARCH, DCC and BEKK, for the crude oil spot and futures returns of two major
benchmark international crude oil markets, Brent and WTI, to calculate optimal portfolio
weights and optimal hedge ratios, and to suggest a crude oil hedge strategy. The empirical
results show that the optimal portfolio weights of all multivariate volatility models for Brent
suggest holding futures in larger proportions than spot. For WTI, however, DCC and BEKK
suggest holding crude oil futures to spot, but CCC and VARMA-GARCH suggest holding
crude oil spot to futures. In addition, the calculated optimal hedge ratios (OHRs) from each
multivariate conditional volatility model give the time-varying hedge ratios, and recommend
to short in crude oil futures with a high proportion of one dollar long in crude oil spot.
Finally, the hedging effectiveness indicates that DCC (BEKK) is the best (worst) model for
OHR calculation in terms of reducing the variance of the portfolio.
|