Performance of Utility Based Hedges

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.