Performance of Utility Based Hedges

39 Pages Posted: 7 Jan 2014  

John Cotter

University College Dublin; Anderson School of Management

Jim Hanly

Dublin Institute of Technology

Date Written: January 6, 2014

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.

Suggested Citation

Cotter, John and Hanly, Jim, Performance of Utility Based Hedges (January 6, 2014). Available at SSRN: https://ssrn.com/abstract=2375146 or http://dx.doi.org/10.2139/ssrn.2375146

John Cotter

Anderson School of Management ( email )

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

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/

Jim Hanly (Contact Author)

Dublin Institute of Technology ( email )

Aungier Street
Dublin 2
Ireland
+35314023180 (Phone)

Paper statistics

Downloads
34
Abstract Views
204