Hedging Effectiveness under Conditions of Asymmetry
John Cotter () and
Jim Hanly ()
No 200843, Working Papers from Geary Institute, University College Dublin
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 crude 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; Lower Partial Moments, Value at Risk, Conditional Value at Risk. (search for similar items in EconPapers)
JEL-codes: G10 G12 G15 (search for similar items in EconPapers)
Pages: 26 pages
New Economics Papers: this item is included in nep-bec and nep-rmg
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http://www.ucd.ie/geary/static/publications/workingpapers/gearywp200843.pdf First version, 2008 (application/pdf)
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 (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ucd:wpaper:200843
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