The effects of skewness on hedging decisions
An application of the skew-normal distribution in WTI and Brent futures
Bibliographic Data
| ID | 15068464 |
|---|---|
| Authors | Xing Yu (0000-0002-1691-3870, Central China Normal University, corresponding author), Xinxin Wang (0000-0003-4043-1916, Central China Normal University), Yuxia Wang (0000-0002-6095-1030, Central China Normal University), Yanyan Li (0009-0000-0010-2654, Central China Normal University) |
| Year | 2022 |
| Volume | 35 |
| Issue | 1 |
| Pages | 3099-3118 |
| Publication date | 2022-12-31 |
| Peer Reviewed | Yes |
| Open Access | Yes |
| Type | ARTICLE |
| Venue | Economic Research-Ekonomska Istraživanja (JOURNAL) |
| Journal identifiers | ISSN: 1331-677X • E-ISSN: 1848-9664 |
| Publisher | Informa UK Limited (PUBLISHER • GB) |
| DOI | 10.1080/1331677x.2021.1986413 |
| OpenAlex | W3205829482 |
| Language | EN |
| References cited | 42 |
Skewness, as a proxy for extreme risks or losses, deserves more attention from risk management work of portfolio selection and futures hedging. We evaluate the hedging performance of strategies considering the skewness for two major benchmark international crude oil markets, Brent and WTI, with sample period ranging from June 11, 2018, to May 19, 2021. This paper contributes to the literature by accounting for futures basis and the skewness of the hedged portfolio return. Specifically, we first extend the existing literature of Lien (), whose study investigated the effect of skewness on optimal production and hedging decisions, to the case of a futures bias existing. Then, we propose minimum-risk hedging models wherein the return of the hedged portfolio return is assumed to follow a skew-normal distribution, which is a generalization of normality assumption. From the empirical results, we find that skewness cannot be ignored, otherwise it will lead to wrong hedging decision. Furthermore, hedging strategies under skew-normal distribution are outperformed than that under the normal distribution assumption. The research results of this paper have important implications for investors and decision makers to hedge the price risk of crude oil in extreme market conditions
Econometrics · Economics · Financial economics · Futures contract · Skew · Skew normal distribution · Skewness · Computer Science · Financial Risk and Volatility Modeling · Insurance and Financial Risk Management · Insurance, Mortality, Demography, Risk Management · Mathematics
A Test for Normality of Observations and Regression Residuals
Coherent Measures of Risk
A scenario-based optimization of Smart Energy Hub operation in a stochastic environment using conditional-value-at-risk
A New Class of Multivariate Skew Densities, With Application to Generalized Autoregressive Conditional Heteroscedasticity Models
Valuation of real-estate losses via Monte Carlo simulation
| Citation velocity | historical |
|---|---|
| Highly cited | No |