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Hedging effectiveness under conditions of asymmetry

  • John Cotter
  • Jim Hanly

We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail-specific metrics, for example, value at risk, to compare the hedging effectiveness of short and long hedgers. Comparisons are applied to a number of hedging strategies including OLS and both symmetric and asymmetric generalised autoregressive conditional heteroskedastic models. We apply our analysis to a dataset consisting of S&P500 index cash and futures containing symmetric and asymmetric return distributions chosen ex post . Our findings show that asymmetry reduces out-of-sample hedging performance and that significant differences occur in hedging performance between short and long hedgers.

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File URL: http://hdl.handle.net/10.1080/1351847X.2011.574977
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Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 18 (2012)
Issue (Month): 2 (February)
Pages: 135-147

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Handle: RePEc:taf:eurjfi:v:18:y:2012:i:2:p:135-147
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