EconPapers    
Economics at your fingertips  
 

Time Varying Risk Aversion: An Application to Energy Hedging

John Cotter () and Jim Hanly ()

No 201007, Working Papers from Geary Institute, University College Dublin

Abstract: Risk aversion is a key element of utility maximizing hedge strategies; however, it has typically been assigned an arbitrary value in the literature. This paper instead applies a GARCH-in-Mean (GARCH-M) model to estimate a time-varying measure of risk aversion that is based on the observed risk preferences of energy hedging market participants. The resulting estimates are applied to derive explicit risk aversion based optimal hedge strategies for both short and long hedgers. Out-of-sample results are also presented based on a unique approach that allows us to forecast risk aversion, thereby estimating hedge strategies that address the potential future needs of energy hedgers. We find that the risk aversion based hedges differ significantly from simpler OLS hedges. When implemented in-sample, risk aversion hedges for short hedgers outperform the OLS hedge ratio in a utility based comparison.

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)
Pages: 45 pages
Date: 2010-01-01
New Economics Papers: this item is included in nep-ene, nep-rmg and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201007.pdf First version, 2010 (application/pdf)

Related works:
Working Paper: Time Varying Risk Aversion: An Application to Energy Hedging (2011) Downloads
Journal Article: Time-varying risk aversion: An application to energy hedging (2010) 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: https://EconPapers.repec.org/RePEc:ucd:wpaper:201007

Access Statistics for this paper

More papers in Working Papers from Geary Institute, University College Dublin Contact information at EDIRC.
Bibliographic data for series maintained by Geary Tech ().

 
Page updated 2021-09-15
Handle: RePEc:ucd:wpaper:201007