Time varying risk aversion : an application to energy hedging

DC FieldValueLanguage
dc.contributor.authorCotter, John-
dc.contributor.authorHanly, Jim-
dc.date.accessioned2010-11-25T16:33:17Z-
dc.date.available2010-11-25T16:33:17Z-
dc.date.issued2009-08-
dc.identifier.urihttp://hdl.handle.net/10197/2599-
dc.description.abstractRisk 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.en
dc.description.sponsorshipNot applicableen
dc.format.extent287190 bytes-
dc.format.mimetypeapplication/pdf-
dc.language.isoenen
dc.publisherUniversity College Dublin. School of Business. Centre for Financial Marketsen
dc.publisherUniversity College Dublin. Geary Institute-
dc.relation.ispartofseriesCentre for Financial Markets working paper seriesen
dc.relation.ispartofseriesWP 09 08en
dc.relation.ispartofseriesUCD Geary Institute Discussion Paper Series-
dc.relation.ispartofseriesWP2010/07-
dc.relation.requiresEconomists Online Collectionen
dc.relation.uriTime varying risk aversion : an application to energy hedging (October 2009)en
dc.relation.urihttp://irserver.ucd.ie/dspace/handle/10197/2168en
dc.subjectEnergyen
dc.subjectHedgingen
dc.subjectRisk managementen
dc.subjectRisk aversionen
dc.subjectForecastingen
dc.subject.classificationG10en
dc.subject.classificationG12en
dc.subject.classificationG15en
dc.subject.lcshHedging (Finance)en
dc.subject.lcshRisk managementen
dc.subject.lcshEnergy industriesen
dc.titleTime varying risk aversion : an application to energy hedgingen
dc.typeWorking Paperen
dc.internal.availabilityFull text availableen
dc.internal.webversionshttp://www.ucd.ie/bankingfinance/docs/wp/WP-09-08-Cotter-Hanly-hedging-energy.pdf-
dc.statusNot peer revieweden
dc.neeo.contributorCotter|John|aut|-
dc.neeo.contributorHanly|Jim|aut|-
item.grantfulltextopen-
item.fulltextWith Fulltext-
Appears in Collections:Geary Institute Working Papers
Centre for Financial Markets Working Papers
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