Hedging China’s Energy Oil Market Risks. Marco Chi Keung Lau Economics Department Zirve University, Turkey June 15, 2011. Chinese Fuel Oil Consumption. Growing Oil Demand in China: - In 2004, China imported 30 million tones of fuel oil (6 million tones in 1995).
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Marco Chi Keung Lau
Zirve University, Turkey
June 15, 2011
- In 2004, China imported 30 million tones of fuel oil (6 million tones in 1995).
- 50% of fuel oil consumption was imported.
- Since world oil price so volatile, domestic selling price may fall short of the import prices and therefore generate losses in those oil refinery firms.
- taking opposite positions in the spot and futures two markets to offset the price their movements.
where the risk aversion coefficient:
- The conventional Bollerslev (1990) constant conditional correlation (CCC)-BGARCH model is:
- The individual variances equations are assumed to have a GARCH( p,q) structure:
- A more flexible bivariate skewed-t distribution proposed by Bauwens and Laurent (2005) due to potential skewness in the spot and futures returns (as can be seen in Table 1 summary statistics).
- Source: Bloomberg Terminal; Period: 24, Aug,2004-27,Jan,2011.
- First, the futures rates of the “nearest” contract are collected until the contract reaches the first week of the expiration month.
- Second, we roll-over to the “next nearest” contract.
- Finally, we repeat the above two steps.
The means of all spot and futures returns are very close to zero.
Shanghai Futures Market: standard deviation of the futures returns is larger than that of the spot returns.
Excess kurtosis: all returns have positive excess kurtosis.
Jarque-Bera test statistics: strongly reject the null hypothesis that the return series are normally distributed.
The Ljung-Box test statistics at lags 20 autocorrelation for the series.
The non-normal distributional properties of the return series,
Table 2 indicates that all return series are stationary which is consistent with the literature.