Optimal Hedge Ratio Under a Subjective Re-Weighting of the Original Measure

25 Pages Posted: 27 Jan 2012 Last revised: 9 Apr 2015

See all articles by Massimiliano Barbi

Massimiliano Barbi

University of Bologna - Department of Management

Silvia Romagnoli

University of Bologna - Department of Statistics

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Date Written: April 8, 2015

Abstract

In this paper we study a risk-minimizing hedge ratio with futures contracts, where the risk of the hedged portfolio is computed using a spectral risk measure, thus incorporating the degree of agent’s risk aversion. We empirically estimate the optimal hedge ratio using a long time series of UK and US equity indices, the EURUSD and EURGBP exchange rates, and the Brent crude oil. Comparing the results with common optimal hedge ratios (such as the minimum-variance, and the minimum-expected shortfall), we find that the agent’s risk aversion has a material impact, and we conclude that the risk aversion parameter cannot be ignored for risk management purposes.

Keywords: Risk management, Spectral risk measures, Expected shortfall, Risk aversion

JEL Classification: G30, G32

Suggested Citation

Barbi, Massimiliano and Romagnoli, Silvia, Optimal Hedge Ratio Under a Subjective Re-Weighting of the Original Measure (April 8, 2015). Available at SSRN: https://ssrn.com/abstract=1992412 or http://dx.doi.org/10.2139/ssrn.1992412

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Silvia Romagnoli

University of Bologna - Department of Statistics ( email )

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