The Use of Multiple Risk Management Strategies: Evidence from the Natural Gas Industry

Posted: 11 May 2006

See all articles by Christopher Geczy

Christopher Geczy

University of Pennsylvania - The Wharton School, Finance Department

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance

Catherine M. Schrand

University of Pennsylvania - Accounting Department

Abstract

Starting in 1978 and continuing throughout the 1980s, natural gas pipelines faced a series of regulatory changes, including price deregulation, which changed their exposures to price and quantity risk. We exploit this unique environment and examine cross-sectional and time-series patterns in the use of multiple risk management strategies by pipeline companies. Natural gas pipelines use a combination of such strategies, including gas storage, cash holdings, line-of-business and geographic diversification, and commodity derivatives to hedge their increasing risks. Gas storage shows a complementary relation to holding cash and using derivatives to mitigate these risks. However, differences in the financial characteristics of derivatives hedgers and storage hedgers suggest that firms use derivatives to manage price risk and store gas to manage volume risk. Derivatives hedgers are similar to firms that diversify. In addition, firms that engage in hedging activities have smaller and less variable sensitivities to price changes than firms that do not, especially post-deregulation.

Keywords: natural gas pipelines, time-series patterns, pipline companies, gas storage, cash holdings, line-of-business, derivatives

Suggested Citation

Geczy, Christopher Charles and Minton, Bernadette A. and Schrand, Catherine M., The Use of Multiple Risk Management Strategies: Evidence from the Natural Gas Industry. Journal of Risk, Vol. 8, No. 3, Spring 2006, Available at SSRN: https://ssrn.com/abstract=900356

Christopher Charles Geczy

University of Pennsylvania - The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(215) 898-1698 (Phone)
(215) 898-6200 (Fax)

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3125 (Phone)
614-292-2359 (Fax)

Catherine M. Schrand (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6798 (Phone)
215-573-2054 (Fax)

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