Hedging Effectiveness under Conditions of Asymmetry

John Cotter and Jim Hanly ()

MPRA Paper from University Library of Munich, Germany

Abstract: We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail specific metrics to compare the hedging effectiveness of short and long hedgers using Oil futures contracts. The metrics used include Lower Partial Moments (LPM), Value at Risk (VaR) and Conditional Value at Risk (CVAR). Comparisons are applied to a number of hedging strategies including OLS and both Symmetric and Asymmetric GARCH models. Our findings show that asymmetry reduces in-sample hedging performance and that there are significant differences in hedging performance between short and long hedgers. Thus, tail specific performance metrics should be applied in evaluating hedging effectiveness. We also find that the Ordinary Least Squares (OLS) model provides consistently good performance across different measures of hedging effectiveness and estimation methods irrespective of the characteristics of the underlying distribution.

Keywords: Hedging Performance; Asymmetry; Downside Risk; Value at Risk, Conditional Value at Risk. JEL classification: G10, G12, G15. ____________________________________________________________________ John Cotter, Director of Centre for Financial Markets, Department of Banking and Finance, University College Dublin, Blackrock, Co. Dublin, Ireland, tel 353 1 716 8900, e-mail john.cotter@ucd.ie. Jim Hanly, School of Accounting and Finance, Dublin Institute of Technology, tel 353 1 402 3180, e-mail james.hanly@dit.ie. The authors would like to thank the participants at the Global Finance Annual Conference for their constructive comments. (search for similar items in EconPapers)
JEL-codes: G13 G15 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Hedging effectiveness under conditions of asymmetry (2012)
Working Paper: Hedging Effectiveness under Conditions of Asymmetry (2011)
Working Paper: Hedging Effectiveness under Conditions of Asymmetry (2011)
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