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Hedging and risk aversion constraints
Alternative Title
Hedging Effectiveness under Conditions of Asymmetry
Author(s)
Date Issued
2005
Date Available
2009-12-08T16:39:26Z
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
Series
Centre For Financial Markets Research Seminar Series
Copyright (Published Version)
2005 Centre For Financial Markets Research
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Not peer reviewed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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