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Commodity futures hedging, risk aversion and the hedging horizon

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  • Thomas Conlon
  • John Cotter
  • Ramazan Gençay

Abstract

This paper examines the impact of management preferences on optimal futures hedging strategy and associated performance. Applying an expected utility hedging objective, the optimal futures hedge ratio is determined for a range of preferences on risk aversion, hedging horizon and expected returns. Empirical results reveal substantial hedge ratio variation across distinct management preferences and are supportive of the hedging policies of real firms. Hedging performance is further shown to be strongly dependent on underlying preferences. In particular, hedgers with high risk aversion and short horizon reduce hedge portfolio risk but achieve inferior utility in comparison to those with low aversion.

Suggested Citation

  • Thomas Conlon & John Cotter & Ramazan Gençay, 2016. "Commodity futures hedging, risk aversion and the hedging horizon," The European Journal of Finance, Taylor & Francis Journals, vol. 22(15), pages 1534-1560, December.
    • Handle: RePEc:taf:eurjfi:v:22:y:2016:i:15:p:1534-1560
    DOI: 10.1080/1351847X.2015.1031912
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