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Performance of Utility Based Hedges

John Cotter () and Jim Hanly ()

No 201404, Working Papers from Geary Institute, University College Dublin

Abstract: Hedgers as investors are concerned with both risk and return; however the literature has generally neglected the role of both returns and investor risk aversion by its focus on minimum variance hedging. In this paper we address this by using utility based performance metrics to evaluate the hedging effectiveness of utility based hedges for hedgers with both moderate and high risk aversion together with the more traditional minimum variance approach. We apply our approach to two asset classes, equity and energy, for three different hedging horizons, daily,weekly and monthly. We find significant differences between the minimum variance and utility based hedges and their attendant performance in-sample for all frequencies. However out of sample performance differences persist for the monthly frequency only.

Keywords: Energy, Hedging Performance; Utility, Risk Aversion (search for similar items in EconPapers)
JEL-codes: G10 G12 G15 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2014-02-19
New Economics Papers: this item is included in nep-ene, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

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http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201404.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: Performance of utility based hedges (2015) Downloads
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