Document Type
Article
Rights
This item is available under a Creative Commons License for non-commercial use only
Abstract
Hedgers as investors are concerned with both risk and return. However when measuring hedging performance, the role of returns and investor risk aversion has generally been neglected in the literature, 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. To examine this for an energy hedger, we apply our approach to WTI Crude Oil, for three different hedging horizons, daily, weekly and monthly. We find significant differences between the minimum variance and utility based hedging strategies in-sample for all frequencies. However performance differentials between the different strategies are small and not economically significant. Out-of-sample results support these findings across all frequencies.
DOI
https://doi.org/10.21427/D77202
Recommended Citation
Cotter, J. & Hanly, J. (2015) Performance of utility based hedges, Energy Economics, 49, 718-726. DOI: 10.1016/j.eneco.2015.04.004
Funder
DIT
Publication Details
Energy Economics, 49, 718-726.