Commodity Futures Hedging, Risk Aversion and the Hedging Horizon

European Journal of Finance (Forthcoming)

37 Pages Posted: 13 Sep 2012 Last revised: 7 Jan 2015

See all articles by Thomas Conlon

Thomas Conlon

University College Dublin

John Cotter

University College Dublin; University of California, Los Angeles (UCLA) - Anderson School of Management

Ramazan Gencay

Simon Fraser University

Date Written: May 29, 2013

Abstract

This paper examines the impact of management preferences on optimal futures hedging strategy and associated performance. Applying an expected utility hedging objective, the optimal futures hedge ratio is determined for a range of preferences on risk aversion, hedging horizon and expected returns. Empirical results reveal substantial hedge ratio variation across distinct management preferences and are supportive of the hedging policies of real firms. Hedging performance is further shown to be strongly dependent on underlying preferences. In particular, hedgers with high risk aversion and short horizon reduce hedge portfolio risk but achieve inferior utility in comparison to those with low aversion.

Keywords: commodity markets, futures hedging, risk aversion, hedging horizon, wavelet analysis, selective hedging

JEL Classification: G10, G15

Suggested Citation

Conlon, Thomas and Cotter, John and Gencay, Ramazan, Commodity Futures Hedging, Risk Aversion and the Hedging Horizon (May 29, 2013). European Journal of Finance (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2145829 or http://dx.doi.org/10.2139/ssrn.2145829

Thomas Conlon (Contact Author)

University College Dublin ( email )

Smurfit Graduate Business School
Blackrock
Co. Dublin, n/a
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/drthomasconlon/

John Cotter

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/professorjohncotter/

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Ramazan Gencay

Simon Fraser University ( email )

Department of Economics
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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