Hedging crude oil using refined product: A regime switching asymmetric DCC approach

- We propose a regime switching asymmetric DCC-GARCH (RS-ADCC) model.
- Our model takes into account both asymmetry and regime switching in correlations.
- RS-ADCC outperforms other GARCH models in hedging crude oil using refined product.
- Heating oil can better hedge crude oil than gasoline.

In this paper, we explore the strategy on hedging crude oil using refined product. We develop a regime switching asymmetric DCC (RS-ADCC) model by taking into account both of regime switching and asymmetry in correlations. Our out-of-sample findings indicate that RS-ADCC displays greater hedging effectiveness than some conventional multivariate GARCH. Heating oil can better hedge crude oil than gasoline.