Optimal hedge ratio under a subjective re-weighting of the original measure

Massimiliano Barbi and Silvia Romagnoli

Applied Economics, 2016, vol. 48, issue 14, 1271-1280

Abstract: In this article we study a risk-minimizing hedge ratio with futures contracts, where the risk of the hedged portfolio is measured through a spectral risk measure (SRM), thus incorporating the degree of agent’s risk aversion. We empirically estimate the optimal hedge ratio (OHR) using a long time series of UK and US equity indices, the EURUSD and EURGBP exchange rates and four liquid commodities (Brent crude oil, corn, gold and copper), to represent different asset classes. Comparing the results with common OHRs (such as the minimum variance and the minimum expected shortfall), we find that the agent’s risk aversion has a material impact, and should not be ignored in risk management.

Date: 2016
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DOI: 10.1080/00036846.2015.1096008

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