Abstract
We present a new model to evaluate the volatility of futures returns. The model is a combination of Dynamic Conditional Correlation and an augmented EGARCH, which allows us to evaluate the differential effects of the trading activity of two classes of optimizing traders. We apply the model to the NYMEX crude oil futures contract, and we find that the rebalancing activity of hedgers has a significant and positive effect on returns volatility. However, we also find that the rebalancing activity attributable to crude oil futures for non-hedging investors has no significant effect.
| Original language | English |
|---|---|
| Pages (from-to) | 1-22 |
| Number of pages | 22 |
| Journal | Macquarie economics research papers |
| Volume | 2006 |
| Issue number | 7 |
| Publication status | Published - 2006 |
Keywords
- portfolio choice
- WTI oil volatility
- optimal hedge ratio
- dynamic conditional correlation