How do crude oil futures hedge crude oil spot risk after the COVID-19 outbreak? A wavelet denoising-GARCHSK-SJC Copula hedge ratio estimation method

In the current paper, we investigate the problem of how do crude oil futures hedge crude oil spot risk after the COVID-19 outbreak. Specifically, given that noise, conditional higher moments and asymmetric tail dependence may exist in crude oil markets, a Wavelet denoising-GARCHSK-SJC Copula hedge ratio estimation method is proposed to construct hedging portfolios in crude oil markets during the epidemic period. Based on the in-sample and out-of-sample results, the hedging roles of Brent futures and Shanghai crude oil (SC) futures for light and medium crude spots after the COVID-19 outbreak are further researched. The empirical results demonstrate that noise, conditional higher moments and asymmetric tail dependence do exist in crude futures and spots, which have impact on the precision of modeling results. Secondly, the Wavelet denoisingGARCHSK-SJC Copula hedge ratio estimation method outperforms all control groups, obtaining the best in-sample and out-of-sample hedging effectiveness. Finally, it is reported in the in-sample and out-of-sample hedging results that Brent is the optimal futures to hedge light oil, while SC is the optimal futures to hedge medium oil. The paper provides substantial recommendations for policymakers and investors. (c) 2022 Elsevier B.V. All rights reserved.