Advanced Search
MyIDEAS: Login

Optimal Hedging with Higher Moments

Contents:

Author Info

  • Chris Brooks

    ()
    (ICMA Centre, University of Reading)

  • A.Cerny

    ()
    (Cass Business School)

  • J. Miffre

    ()
    (Cass Business School)

Abstract

This study proposes a utility-based framework for the determination of optimal hedge ratios that can allow for the impact of higher moments on the hedging decision. The approach is applied to a set of 20 commodities that are hedged with futures contracts. We find that in sample, the performance of hedges constructed allowing for non-zero higher moments is only very slightly better than the performance of the much simpler OLS hedge ratio. When implemented out of sample, utility-based hedge ratios are usually less stable over time, and can make investors worse off for some assets compared to hedging using the traditional methods. We conclude, in common with a growing body of very recent literature, by suggesting that higher moments matter in theory but not in practice.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2006-12.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2006-12.

as in new window
Length: 33 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:rdg:icmadp:icma-dp2006-12

Contact details of provider:
Postal: PO Box 218, Whiteknights, Reading, Berks, RG6 6AA
Phone: +44 (0) 118 378 8226
Fax: +44 (0) 118 975 0236
Web page: http://www.henley.reading.ac.uk/
More information through EDIRC

Related research

Keywords: Utility-based hedging; OLS; Non-normality; risk; commodity futures; skewness; kurtosis;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Chris Brooks & Harry. M Kat, 2001. "The Statistical Properties of Hedge Fund Index Returns," ICMA Centre Discussion Papers in Finance icma-dp2001-09, Henley Business School, Reading University.
  2. Chunhachinda, Pornchai & Dandapani, Krishnan & Hamid, Shahid & Prakash, Arun J., 1997. "Portfolio selection and skewness: Evidence from international stock markets," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 143-167, February.
  3. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
  4. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March.
  5. Y. Peter Chung & Michael J. Schill, 2006. "Asset Pricing When Returns Are Nonnormal: Fama-French Factors versus Higher-Order Systematic Comoments," The Journal of Business, University of Chicago Press, vol. 79(2), pages 923-940, March.
  6. 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.
  7. Christie-David, Rohan & Chaudhry, Mukesh, 2001. "Coskewness and cokurtosis in futures markets," Journal of Empirical Finance, Elsevier, vol. 8(1), pages 55-81, March.
  8. Giovanni Barone Adesi & Patrick Gagliardini & Giovanni Urga, 2004. "Testing Asset Pricing Models With Coskewness," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 474-485, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Stutzer, Michael, 2013. "Optimal hedging via large deviation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(15), pages 3177-3182.
  2. John Cotter & Jim Hanly, 2014. "Performance of Utility Based Hedges," Working Papers 201404, Geary Institute, University College Dublin.
  3. Brian Lucey & Britta Berghöfer, 2013. "Fuel Hedging, Operational Hedging and Risk Exposure– Evidence from the Global Airline Industry," The Institute for International Integration Studies Discussion Paper Series iiisdp433, IIIS.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:rdg:icmadp:icma-dp2006-12. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ed Quick).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.