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A utility based approach to energy hedging

John Cotter () and Jim Hanly ()

Energy Economics, 2012, vol. 34, issue 3, 817-827

Abstract: A key issue in the estimation of energy hedges is the hedgers' attitude towards risk which is encapsulated in the form of the hedgers' utility function. However, the literature typically uses only one form of utility function such as the quadratic when estimating hedges. This paper addresses this issue by estimating and applying energy market based risk aversion to commonly applied utility functions including log, exponential and quadratic, and we incorporate these in our hedging frameworks. We find significant differences in the optimal hedge strategies based on the utility function chosen.

Keywords: Energy; Hedging; Risk management; Risk aversion; Forecasting (search for similar items in EconPapers)
JEL-codes: G10 G12 G15 (search for similar items in EconPapers)
Date: 2012
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Working Paper: A Utility Based Approach to Energy Hedging (2011) Downloads
Working Paper: A Utility Based Approach to Energy Hedging (2011) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:34:y:2012:i:3:p:817-827

DOI: 10.1016/j.eneco.2011.07.009

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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