Hedging Effectiveness Under Conditions of Asymmetry

24 Pages Posted: 26 Jun 2007

See all articles by John Cotter

John Cotter

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

Jim Hanly

Technological University Dublin

Date Written: March 31, 2006

Abstract

We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail specific metrics to compare the hedging effectiveness of short and long hedgers using Oil futures contracts. The metrics used include Lower Partial Moments (LPM), Value at Risk (VaR) and Conditional Value at Risk (CVAR). Comparisons are applied to a number of hedging strategies including OLS and both Symmetric and Asymmetric GARCH models. Our findings show that asymmetry reduces in-sample hedging performance and that there are significant differences in hedging performance between short and long hedgers. Thus, tail-specific performance metrics should be applied in evaluating hedging effectiveness. We also find that the Ordinary Least Squares (OLS) model provides consistently good performance across different measures of hedging effectiveness and estimation methods irrespective of the characteristics of the underlying distribution.

Keywords: Hedging Performance, Asymmetry, Downside Risk, Value at Risk, Conditional

JEL Classification: G10, G12, G15

Suggested Citation

Cotter, John and Hanly, Jim, Hedging Effectiveness Under Conditions of Asymmetry (March 31, 2006). Available at SSRN: https://ssrn.com/abstract=996073 or http://dx.doi.org/10.2139/ssrn.996073

John Cotter (Contact Author)

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

Jim Hanly

Technological University Dublin ( email )

Dublin
Ireland
+35314023180 (Phone)

HOME PAGE: http://www.jimhanly.com

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