Hedging and risk aversion constraints

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Title: Hedging and risk aversion constraints
Authors: Cotter, John
Hanly, Jim
Permanent link: http://hdl.handle.net/10197/1698
Date: 2005
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: Conference Publication
Publisher: University College Dublin. School of Business. Centre for Financial Markets
Copyright (published version): 2005 Centre For Financial Markets Research
Subject LCSH: Hedging (Finance)--Evaluation
Risk--Econometric models
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Business Research Collection

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