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Mean-variance hedging with oil futures

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Abstract

We analyze mean-variance-optimal dynamic hedging strategies in oil producers and consumers. In a model for the oil spot and futures market with Gaussian convenience yield curves and a stochastic market price of risk, we find analytical solutions for the optimal trading strategies. An implementation of our strategies in an out-of-sample test on market data shows that the hedging strategies improve long-term return risk profiles of both the producer and the consumer.

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2011-08-29

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mean-variance hedging; hedging; fuel hedging; energy futures market

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