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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

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Download WP-09-08-Cotter-Hanly-hedging-energy.pdf280.46 KB
Author(s)
Cotter, John 
Hanly, Jim 
Uri
http://hdl.handle.net/10197/2599
Date Issued
August 2009
Date Available
25T16:33:17Z November 2010
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
Not applicable
Type of Material
Working Paper
Publisher
University College Dublin. School of Business. Centre for Financial Markets
University College Dublin. Geary Institute
Series
Centre for Financial Markets working paper series
WP 09 08
UCD Geary Institute Discussion Paper Series
WP2010/07
Keywords
  • Energy

  • Hedging

  • Risk management

  • Risk aversion

  • Forecasting

Classification
G10
G12
G15
Subject – LCSH
Hedging (Finance)
Risk management
Energy industries
Web versions
http://www.ucd.ie/bankingfinance/docs/wp/WP-09-08-Cotter-Hanly-hedging-energy.pdf
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
https://creativecommons.org/licenses/by-nc-sa/1.0/
Owning collection
Centre for Financial Markets Working Papers
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2179
Acquisition Date
Mar 20, 2023
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