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Re-evaluating Hedging Performance

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  • Cotter, John
  • Hanly, James

Abstract

Mixed results have been documented for the performance of hedging strategies using futures. This paper reinvestigates this issue using an extensive set of performance evaluation metrics across seven international markets. We compare the hedging performance of short and long hedgers using traditional variance based approaches together with modern risk management techniques including Value at Risk, Conditional Value at Risk and approaches based on Downside Risk. Our findings indicate that using these metrics to evaluate hedging performance, yields differences in terms of best hedging strategy as compared with the traditional variance measure. We also find significant differences in performance between short and long hedgers. These results are observed both in-sample and out-of-sample.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3523.

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Date of creation: 2005
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Handle: RePEc:pra:mprapa:3523

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References

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  1. Donald Lien & Y. K. Tse & Albert Tsui, 2002. "Evaluating the hedging performance of the constant-correlation GARCH model," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(11), pages 791-798.
  2. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(01), pages 122-150, February.
  3. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 28(04), pages 535-551, December.
  4. Conrad, Jennifer & Gultekin, Mustafa N & Kaul, Gautam, 1991. "Asymmetric Predictability of Conditional Variances," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(4), pages 597-622.
  5. Chris Brooks & Olan T. Henry & Gita Persand, 2002. "The Effect of Asymmetries on Optimal Hedge Ratios," The Journal of Business, University of Chicago Press, vol. 75(2), pages 333-352, April.
  6. Stephen G. Cecchetti & Robert E. Cumby & Stephen Figlewski, 1986. "Estimation of the optimal futures hedge," Research Working Paper, Federal Reserve Bank of Kansas City 86-10, Federal Reserve Bank of Kansas City.
  7. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 34(1), pages 157-70, March.
  8. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(1), pages 116-31, February.
  9. repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
  10. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  11. Tasche, Dirk, 2002. "Expected shortfall and beyond," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(7), pages 1519-1533, July.
  12. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, American Economic Association, vol. 67(2), pages 116-26, March.
  13. Lien, Donald & Tse, Y K, 2002. " Some Recent Developments in Futures Hedging," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(3), pages 357-96, July.
  14. Demirer, Riza & Lien, Donald & Shaffer, David R., 2005. "Comparisons of short and long hedge performance: the case of Taiwan," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 15(1), pages 51-66, February.
  15. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, Elsevier, vol. 2(1), pages 95-121, March.
  16. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun.
  17. Demirer, Riza & Lien, Donald, 2003. "Downside risk for short and long hedgers," International Review of Economics & Finance, Elsevier, Elsevier, vol. 12(1), pages 25-44.
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Cited by:
  1. Dinica, Mihai Cristian & Armeanu, Daniel, 2014. "The Optimal Hedging Ratio for Non-Ferrous Metals," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 105-122, March.
  2. John Cotter & Jim Hanly, 2011. "Hedging Effectiveness under Conditions of Asymmetry," Papers 1103.5411, arXiv.org.
  3. Wagner Oliveira Monteiro & Rodrigo De Losso da Silveira Bueno, 2011. "Dynamic Hedging inMarkov Regimes Switching," Anais do XXXVII Encontro Nacional de Economia [Proceedings of the 37th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of 136, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  4. John Cotter & Jim Hanly, 2014. "Performance of Utility Based Hedges," Working Papers, Geary Institute, University College Dublin 201404, Geary Institute, University College Dublin.
  5. Amine Lahiani & Khaled Guesmi, 2014. "Commodity Price Correlation and Time varying Hedge Ratios," Working Papers 2014-142, Department of Research, Ipag Business School.
  6. Power, Gabriel J. & Vedenov, Dmitry V., 2008. "The Shape of the Optimal Hedge Ratio: Modeling Joint Spot-Futures Prices using an Empirical Copula-GARCH Model," 2008 Conference, April 21-22, 2008, St. Louis, Missouri, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management 37609, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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