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
Date Written: May 29, 2013
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: Suggested Citation