An empirical comparison of stabilization funds and futures hedging for oil exporting developing countries

Oil price volatility can significantly affect the growth and development of oil exporting developing countries. Given the widespread use of stabilization funds as a risk management tool by such countries and the potential of futures hedging to function in a similar vein, no study has effectively compared both mechanisms. This article hence uses the hedging effectiveness measure to examine the potential of each mechanism to smooth the volatile revenues of oil exporting developing countries. The results show that stabilization funds performed best with larger deposit rates and using benchmark prices with larger moving averages. However, the volatility reduction capabilities of optimal futures hedging were found to be far superior and should thus be adopted by oil dependent developing countries as their prime revenue smoothening mechanism.