A Utility Based Approach to Energy Hedging
AbstractA key issue in the estimation of energy hedges is the hedgers’ attitude towards risk which is encapsulated in the form of the hedgers’ utility function. However, the literature typically uses only one form of utility function such as the quadratic when estimating hedges. This paper addresses this issue by estimating and applying energy market based risk aversion to commonly applied utility functions including log, exponential and quadratic, and we incorporate these in our hedging frameworks. We find significant differences in the optimal hedge strategies based on the utility function chosen.
Download InfoIf 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.
Bibliographic InfoPaper provided by Geary Institute, University College Dublin in its series Working Papers with number 201106.
Length: 47 pages
Date of creation: 02 Mar 2011
Date of revision:
Energy; Hedging; Risk Management; Risk Aversion; Forecasting;
Other versions of this item:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-12 (All new papers)
- NEP-ENE-2011-03-12 (Energy Economics)
- NEP-RMG-2011-03-12 (Risk Management)
- NEP-UPT-2011-03-12 (Utility Models & Prospect Theory)
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.:
- David Cabedo, J. & Moya, Ismael, 2003. "Estimating oil price 'Value at Risk' using the historical simulation approach," Energy Economics, Elsevier, vol. 25(3), pages 239-253, May.
- Eric Ghysels & Pedro Santa-Clara & Rossen Valkanov, 2004.
"There is a Risk-Return Tradeoff After All,"
NBER Working Papers
10913, National Bureau of Economic Research, Inc.
- 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, vol. 96(1), pages 116-31, February.
- Regnier, Eva, 2007. "Oil and energy price volatility," Energy Economics, Elsevier, vol. 29(3), pages 405-427, May.
- Townsend, R.M., 1991.
"Risk and Insurance in Village India,"
University of Chicago - Economics Research Center
91-3, Chicago - Economics Research Center.
- Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
- Alberto Giovannini & Philippe Jorion, 1989.
"The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets,"
NBER Working Papers
2573, National Bureau of Economic Research, Inc.
- Giovannini, Alberto & Jorion, Philippe, 1989. " The Time Variation of Risk and Return in the Foreign Exchange and Stock Markets," Journal of Finance, American Finance Association, vol. 44(2), pages 307-25, June.
- John Cotter & Jim Hanly, 2010.
"Time Varying Risk Aversion: An Application to Energy Hedging,"
201007, Geary Institute, University College Dublin.
- Cotter, John & Hanly, Jim, 2010. "Time-varying risk aversion: An application to energy hedging," Energy Economics, Elsevier, vol. 32(2), pages 432-441, March.
- Cotter, John & Hanly, Jim, 2009. "Time varying risk aversion : an application to energy hedging," Open Access publications from University College Dublin urn:hdl:10197/2168, University College Dublin.
- John Cotter & Jim Hanly, 2011. "Time Varying Risk Aversion: An Application to Energy Hedging," Papers 1103.5968, arXiv.org.
- Cotter, John & Hanly, Jim, 2010. "Time-varying risk aversion : an application to energy hedging," Open Access publications from University College Dublin urn:hdl:10197/1720, University College Dublin.
- 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.
- Brandt, Michael W. & Wang, Kevin Q., 2003. "Time-varying risk aversion and unexpected inflation," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1457-1498, October.
- Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- 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, vol. 28(04), pages 535-551, December.
- Stephen G. Cecchetti & Robert E. Cumby & Stephen Figlewski, 1986.
"Estimation of the optimal futures hedge,"
Research Working Paper
86-10, Federal Reserve Bank of Kansas City.
- Conlon, Thomas & Cotter, John, 2013.
"Downside risk and the energy hedger's horizon,"
Elsevier, vol. 36(C), pages 371-379.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Geary Tech).
If references are entirely missing, you can add them using this form.