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.
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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; Trading Volume; Bond Interest Rates
- 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)
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