A novel risk management framework for natural gas markets. Issue 3 (15th October 2019)

• Record Type: Journal Article
• Authors: Pouliasis, Panos K.; Visvikis, Ilias D.; Papapostolou, Nikos C.; Kryukov, Alexander A.
• Is Part Of: Journal of futures markets. Volume 40:Issue 3(2020)
• Page Start: 430
• Page End: 459
• Publication Date: 2019-10-15
• Subjects: dynamic futures hedging -- forecast combination -- natural gas; Commodity exchanges -- Periodicals; Foreign exchange futures -- Periodicals; 332.632
• DOI: 10.1002/fut.22067
• Languages: English
• ISSNs: 0270-7314

Abstract

Abstract: This paper examines dynamic hedges in the natural gas futures markets for different horizons and explores the gains from devising risk management strategies. Despite the substantial progress made in developing hedging models, forecast combinations have not been explored. We fill this gap by proposing a framework for combining hedge‐ratio predictions. Composite hedge ratios lead to significant reduction in portfolio risk, whether spot prices are partially predictable or not. We offer insights on hedging effectiveness across seasons, backwardation‐contango conditions and the asymmetric profiles of long‐short hedgers. We conclude that forecast combinations better reconcile realized performance with the hedging process, mitigating model instability.