Optimal Hedge Ratio Under a Subjective Re-Weighting of the Original Measure
Posted: 22 Sep 2015 Last revised: 19 Feb 2016
Date Written: September 15, 2015
In this paper we study a risk-minimizing hedge ratio with futures contracts, where the risk of the hedged portfolio is measured through 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 four liquid commodities, to represent different asset classes, i.e. Brent crude oil, corn, gold, and copper. 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 should not be ignored in risk management.
Keywords: Risk management, Spectral risk measures, Expected shortfall, Risk aversion
JEL Classification: G30, G32
Suggested Citation: Suggested Citation