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  5. Time varying risk aversion : an application to energy hedging
 
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Time varying risk aversion : an application to energy hedging

Author(s)
Cotter, John  
Hanly, Jim  
Uri
http://hdl.handle.net/10197/2168
Date Issued
2009
Date Available
2010-07-15T13:25:10Z
Abstract
Risk aversion is a key element of utility maximizing hedge strategies; however, it has typically been assigned an arbitrary value in the literature. This paper instead applies a GARCH-in-Mean (GARCH-M) model to estimate a time-varying measure of risk aversion that is based on the observed risk preferences of energy hedging market participants. The resulting estimates are applied to derive explicit risk aversion based optimal hedge strategies for both short and long hedgers. Out-of-sample results are also presented based on a unique approach that allows us to forecast risk aversion, thereby estimating hedge strategies that address the potential future needs of energy hedgers. We find that the risk aversion based hedges differ significantly from simpler OLS hedges. When implemented in-sample, risk aversion hedges for short hedgers outperform the OLS hedge ratio in a utility based comparison.
Sponsorship
Science Foundation Ireland
Other Sponsorship
University College Dublin. School of Business
Type of Material
Conference Publication
Subjects

Energy

Hedging

Risk management

Risk aversion

Forecasting

Classification
G10
G12
G15
Subject – LCSH
Hedging (Finance)
Risk management
Energy industries
Web versions
http://69.175.2.130/~finman/Reno/Papers/TimeVaryingRiskAversionAnApplicationtoEnergyHedging.pdf
Language
English
Status of Item
Not peer reviewed
Conference Details
Annual meeting of the Financial Management Association International, October 21-24 2009, Reno, Nevada
This item is made available under a Creative Commons License
https://creativecommons.org/licenses/by-nc-sa/1.0/
File(s)
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Name

Explicit Risk Aversion paper 2009.pdf

Size

721.48 KB

Format

Adobe PDF

Checksum (MD5)

2c119b13c9d6e5efa8bf66794e6cb6c6

Owning collection
Business Research Collection
Mapped collections
FMC² Research Collection

Item descriptive metadata is released under a CC-0 (public domain) license: https://creativecommons.org/public-domain/cc0/.
All other content is subject to copyright.

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