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

Posted: 22 Sep 2015 Last revised: 19 Feb 2016

See all articles by Massimiliano Barbi

Massimiliano Barbi

University of Bologna - Department of Management

Silvia Romagnoli

University of Bologna - Department of Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: September 15, 2015

Abstract

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

Barbi, Massimiliano and Romagnoli, Silvia, Optimal Hedge Ratio Under a Subjective Re-Weighting of the Original Measure (September 15, 2015). Applied Economics, Vol. 48, pp. 1271-1280, 2016. Available at SSRN: https://ssrn.com/abstract=2663610

Massimiliano Barbi (Contact Author)

University of Bologna - Department of Management ( email )

via Capo di Lucca 34
Bologna, 40126
Italy
+39 051 2098404 (Phone)
+39 051 246411 (Fax)

HOME PAGE: http://www.sites.google.com/site/massimilianobarbifinance/

Silvia Romagnoli

University of Bologna - Department of Statistics ( email )

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
247
PlumX Metrics