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Performance of Utility Based Hedges

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Download Performance.pdf331.54 KB
Author(s)
Cotter, John 
Hanly, Jim 
Uri
http://hdl.handle.net/10197/7009
Date Issued
May 2015
Date Available
01T01:00:10Z May 2018
Abstract
Hedgers as investors are concerned with both risk and return; however the literature has generally neglected the role of both returns and investor risk aversion by its focus on minimum variance hedging. In this paper we address this by using utility based performance metrics to evaluate the hedging effectiveness of utility based hedges for hedgers with both moderate and high risk aversion together with the more traditional minimum variance approach. We apply our approach to two asset classes, equity and energy, for three different hedging horizons, daily, weekly and monthly. We find significant differences between the minimum variance and utility based hedges and their attendant performance in-sample for all frequencies. However out of sample performance differences persist for the monthly frequency only.
Sponsorship
Science Foundation Ireland
Type of Material
Journal Article
Publisher
Elsevier
Journal
Energy Economics
Volume
49
Start Page
718
End Page
726
Copyright (Published Version)
2015 Elsevier
Keywords
  • Hedging performance

  • Utility

  • Energy

  • Risk aversion

Classification
G10
G12
G15
DOI
10.1016/j.eneco.2015.04.004
Language
English
Status of Item
Peer reviewed
This item is made available under a Creative Commons License
https://creativecommons.org/licenses/by-nc-nd/3.0/ie/
Owning collection
FMC² Research Collection
Scopus© citations
14
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Feb 5, 2023
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