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Cross hedging under multiplicative basis risk

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Cross hedging under multiplicative basis risk. / Adam-Müller, Axel; Nolte, Ingmar.

In: Journal of Banking and Finance, Vol. 35, No. 11, 11.2011, p. 2956-2964.

Research output: Contribution to journalJournal articlepeer-review

Harvard

Adam-Müller, A & Nolte, I 2011, 'Cross hedging under multiplicative basis risk', Journal of Banking and Finance, vol. 35, no. 11, pp. 2956-2964. https://doi.org/10.1016/j.jbankfin.2011.03.022

APA

Adam-Müller, A., & Nolte, I. (2011). Cross hedging under multiplicative basis risk. Journal of Banking and Finance, 35(11), 2956-2964. https://doi.org/10.1016/j.jbankfin.2011.03.022

Vancouver

Adam-Müller A, Nolte I. Cross hedging under multiplicative basis risk. Journal of Banking and Finance. 2011 Nov;35(11):2956-2964. https://doi.org/10.1016/j.jbankfin.2011.03.022

Author

Adam-Müller, Axel ; Nolte, Ingmar. / Cross hedging under multiplicative basis risk. In: Journal of Banking and Finance. 2011 ; Vol. 35, No. 11. pp. 2956-2964.

Bibtex

@article{385ae4ab0e694bd5b98205e112854b43,
title = "Cross hedging under multiplicative basis risk",
abstract = "Cross hedging price risk in an incomplete financial market creates basis risk. We propose a new way of modeling basis risk where price risk and basis risk are combined in a multiplicative way. Under this specification, positive prudence is a necessary and sufficient condition for underhedging in an unbiased market. Using the example of cross hedging jet fuel price risk with crude oil futures, we show that the new specification is superior in describing the price series and that optimal cross hedges differ significantly from those derived under the traditional additive cross hedging model.",
keywords = "risk management, cross hedging, basis risk, prudence, jet fuel, crude oil futures, vector error, correction model",
author = "Axel Adam-M{\"u}ller and Ingmar Nolte",
year = "2011",
month = nov,
doi = "10.1016/j.jbankfin.2011.03.022",
language = "English",
volume = "35",
pages = "2956--2964",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
publisher = "Elsevier",
number = "11",

}

RIS

TY - JOUR

T1 - Cross hedging under multiplicative basis risk

AU - Adam-Müller, Axel

AU - Nolte, Ingmar

PY - 2011/11

Y1 - 2011/11

N2 - Cross hedging price risk in an incomplete financial market creates basis risk. We propose a new way of modeling basis risk where price risk and basis risk are combined in a multiplicative way. Under this specification, positive prudence is a necessary and sufficient condition for underhedging in an unbiased market. Using the example of cross hedging jet fuel price risk with crude oil futures, we show that the new specification is superior in describing the price series and that optimal cross hedges differ significantly from those derived under the traditional additive cross hedging model.

AB - Cross hedging price risk in an incomplete financial market creates basis risk. We propose a new way of modeling basis risk where price risk and basis risk are combined in a multiplicative way. Under this specification, positive prudence is a necessary and sufficient condition for underhedging in an unbiased market. Using the example of cross hedging jet fuel price risk with crude oil futures, we show that the new specification is superior in describing the price series and that optimal cross hedges differ significantly from those derived under the traditional additive cross hedging model.

KW - risk management

KW - cross hedging

KW - basis risk

KW - prudence

KW - jet fuel

KW - crude oil futures

KW - vector error

KW - correction model

U2 - 10.1016/j.jbankfin.2011.03.022

DO - 10.1016/j.jbankfin.2011.03.022

M3 - Journal article

VL - 35

SP - 2956

EP - 2964

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

IS - 11

ER -