Economics at your fingertips  

Performance of utility based hedges

John Cotter () and Jim Hanly ()

Energy Economics, 2015, vol. 49, issue C, 718-726

Abstract: Hedgers as investors are concerned with both risk and return. However when measuring hedging performance, the role of returns and investor risk aversion has generally been neglected in the literature, 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. To examine this for an energy hedger, we apply our approach to WTI Crude Oil, for three different hedging horizons, daily, weekly and monthly. We find significant differences between the minimum variance and utility based hedging strategies in-sample for all frequencies. However performance differentials between the different strategies are small and not economically significant. Out-of-sample results support these findings across all frequencies.

Keywords: Hedging performance; Utility; Energy; Risk aversion (search for similar items in EconPapers)
JEL-codes: G10 G12 G15 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Performance of Utility Based Hedges (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.eneco.2015.04.004

Access Statistics for this article

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

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2021-08-14
Handle: RePEc:eee:eneeco:v:49:y:2015:i:c:p:718-726