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Re-Evaluating Hedging Performance for Asymmetry: The Case of Crude Oil

In: Derivative Securities Pricing and Modelling

Author

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  • John Cotter
  • Jim Hanly

Abstract

We examine whether the hedging effectiveness of crude oil futures is affected by asymmetry in the return distribution by applying tail-specific metrics to compare the hedging effectiveness of both short and long hedgers. The hedging effectiveness metrics we use are based on lower partial moments (LPM), value at risk (VaR) and conditional value at risk (CVaR). Comparisons are applied to a number of hedging strategies including ordinary least square (OLS), and both symmetric and asymmetric GARCH models. We find that OLS provides consistently better performance across different measures of hedging effectiveness as compared with GARCH models, irrespective of the characteristics of the underlying distribution.

Suggested Citation

  • John Cotter & Jim Hanly, 2012. "Re-Evaluating Hedging Performance for Asymmetry: The Case of Crude Oil," Contemporary Studies in Economic and Financial Analysis, in: Derivative Securities Pricing and Modelling, pages 259-280, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:csefzz:s1569-3759(2012)0000094013
    DOI: 10.1108/S1569-3759(2012)0000094013
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