Hedging Effectiveness under Conditions of Asymmetry
AbstractWe 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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 3501.
Date of creation: 2007
Date of revision:
Hedging Performance; Asymmetry; Downside Risk; Value at Risk; Conditional Value at Risk. JEL classification: G10; G12; G15. ____________________________________________________________________ John Cotter; Director of Centre for Financial Markets; Department of Banking and Finance; University College Dublin; Blackrock; Co. Dublin; Ireland; tel 353 1 716 8900; e-mail firstname.lastname@example.org. Jim Hanly; School of Accounting and Finance; Dublin Institute of Technology; tel 353 1 402 3180; e-mail email@example.com. The authors would like to thank the participants at the Global Finance Annual Conference for their constructive comments.;
Other versions of this item:
- John Cotter & Jim Hanly, 2012. "Hedging effectiveness under conditions of asymmetry," The European Journal of Finance, Taylor & Francis Journals, vol. 18(2), pages 135-147, February.
- John Cotter & Jim Hanly, 2011. "Hedging Effectiveness under Conditions of Asymmetry," Working Papers 200843, Geary Institute, University College Dublin.
- John Cotter & Jim Hanly, 2011. "Hedging Effectiveness under Conditions of Asymmetry," Papers 1103.5411, arXiv.org.
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-18 (All new papers)
- NEP-FMK-2007-06-18 (Financial Markets)
- NEP-RMG-2007-06-18 (Risk Management)
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