@article{Scarpa:12115,
      recid = {12115},
      author = {Scarpa, Elisa and Manera, Matteo},
      title = {Pricing and Hedging Illiquid Energy Derivatives: an  Application to the JCC Index},
      address = {2006},
      number = {833-2016-55462},
      series = {IEM Nota di Lavoro 130.2006},
      pages = {25},
      year = {2006},
      abstract = {In this paper we discuss a simple econometric strategy for  pricing and hedging illiquid financial products, such as  the Japanese crude oil cocktail (JCC) index, the most  popular OTC energy derivative in Japan. First, we review  the existing literature for computing optimal hedge ratios  (OHR) and we propose a critical classification of the  existing approaches. Second, we compare the empirical  performance of different econometric models (namely,  regression models in price-levels, price first differences,  price returns, as well as error correction and  autoregressive distributed lag models) in terms of their  computed OHR using monthly data on the JCC over the period  January 2000-January 2006. Third, we illustrate and  implement a procedure to cross-hedge and price two  different swaps on the JCC: a one-month swap and a  three-month swap with a variable oil volume. We explain how  to compute a bid/ask spread and to construct the hedging  position for the JCC swap. Fourth, we evaluate our swap  pricing scheme with backtesting and rolling regression  techniques. Our empirical findings show that it is not  necessary to use sophisticated econometric techniques,  since the price level regression model permits to compute a  more reliable optimal hedge ratio relative to its competing  alternatives.},
      url = {http://ageconsearch.umn.edu/record/12115},
      doi = {https://doi.org/10.22004/ag.econ.12115},
}