Performance of Utility Based Hedges

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Title: Performance of Utility Based Hedges
Authors: Cotter, John
Hanly, Jim
Permanent link: http://hdl.handle.net/10197/7009
Date: May-2015
Abstract: 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.
Funding Details: Science Foundation Ireland
Type of material: Journal Article
Publisher: Elsevier
Copyright (published version): 2015 Elsevier
Keywords: Hedging performance;Utility;Energy;Risk aversion
DOI: 10.1016/j.eneco.2015.04.004
Language: en
Status of Item: Peer reviewed
Appears in Collections:FMC² Research Collection

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