Hedge Ratio Variation under Different Energy Market Conditions: New Evidence by Using Quantile-Quantile Approach

In this research, the optimal hedge ratio (OHR) for crude oil, natural gas, and gasoline spot and futures prices were examined by using the recently developed quantile on quantile (QQ) approach (Sim and Zhou, 2015). Compared to the previous methods, QQ approach can provide more extensive and complete picture of the overall dependence structure between the variables under investigation. I used monthly data, and the time span was dictated by the data availability for each variable. Obtained results confirmed the asymmetric response of the spot prices to the changes in futures prices for all three commodities. Besides, findings show that the OHR is significantly higher than one in a bullish market and for large positive shocks for all the commodities. Also, as the maturities of the futures contracts increase lower fluctuations in the OHR were observed. The most important contribution of this research is to provide evidence on the variation of the OHR across the distributions of spot and futures prices which has important implications for policy makers and practitioners.