Commodity futures hedging, risk aversion and the hedging horizon
Thomas Conlon (),
John Cotter () and
No 201218, Working Papers from Geary Institute, University College Dublin
This paper examines the impact of investor preferences on the optimal futures hedging strategy and associated hedging performance. Explicit risk aversion levels are often overlooked in hedging analysis. Applying a mean-variance hedging objective, the optimal futures hedging ratio is determined for a range of investor preferences on risk aversion, hedging horizon and expected returns. Wavelet analysis is applied to illustrate how investor time horizon shapes hedging strategy. Empirical results reveal substantial variation of the optimal hedge ratio for distinct investor preferences and are supportive of the hedging policies of real firms. Hedging performance is then shown to be strongly dependent on underlying preferences. In particular, investors with high levels of risk aversion and a short horizon reduce the risk of the hedge portfolio but achieve inferior utility in comparison to those with low risk aversion.
Keywords: Commodity Markets; Futures Hedging; Risk Aversion; Hedging Horizon; Wavelet Analysis; Selective Hedging (search for similar items in EconPapers)
Pages: 37 pages
New Economics Papers: this item is included in nep-upt
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http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201218.pdf First version, 2012 (application/pdf)
Journal Article: Commodity futures hedging, risk aversion and the hedging horizon (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ucd:wpaper:201218
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