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Hedging effectiveness under conditions of asymmetry
Author(s)
Date Issued
2007
Date Available
2009-06-15T14:15:16Z
Abstract
We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail specific metrics to compare the hedging effectiveness of short and long hedgers
using crude oil futures contracts. The metrics used include Lower Partial Moments (LPM), Value at Risk (VaR) and Conditional Value at Risk (CVAR). Comparisons are applied to a number of hedging strategies including OLS and both Symmetric and Asymmetric GARCH models. Our findings show that asymmetry reduces in-sample hedging performance and that there are
significant differences in hedging performance between short and long hedgers. Thus, tail specific performance metrics should be applied in evaluating hedging effectiveness. We also find that the Ordinary Least Squares (OLS) model provides consistently good performance across
different measures of hedging effectiveness and estimation methods irrespective of the
characteristics of the underlying distribution.
Type of Material
Working Paper
Publisher
University College Dublin. School of Business. Centre for Financial Markets
Series
Centre for Financial Markets working paper series
WP-07-08
Copyright (Published Version)
2007, Centre for Financial Markets
Classification
G10
G12
G15
Subject – LCSH
Hedging (Finance)--Evaluation
Risk--Econometric models
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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