Comparison of the hedging performance in crude oil and natural gas

The paper examines the issue of hedging against price risk of the key energy sources. The subjects of research are the spot prices of the West Texas Intermediate and the Henry Hub. The risk protection is provided by applying the future contracts of underlying assets. The hedge ratio is determined by using the OLS, Naive portfolio, Copula and Arch/Garch. Afterwards, the ability to reduce risk was measured by hedging effectiveness over twelve months period. The significance of distinct models was evaluated on the sum of residual risk. The results confirmed that the applied model for crude oil is irrelevant in comparison to the natural gas, where the employed models provided significant differences in hedging effectiveness.