Is there a robust hedging method during the COVID-19 pandemic? Evidence from Chinese crude oil futures

Abstract

This paper focuses on finding an excellent and robust hedging method during the COVID-19 pandemic. We develop a novel hedging framework based on the conventional approach for the Chinese oil futures market. Commonly used hedging models are employed to compare hedging performance under these methodological frameworks. Our results show that the proposed shrinking hedging framework demonstrates the highest hedging effectiveness among all the competitors, especially during the COVID-19 pandemic. The main findings also stand up to several robustness tests. Moreover, the empirical results reveal that the superior performance of our shrinking method can be attributed to the high estimation error of minimum-variance hedging strategies.