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An empirical study of the impact of skewness and kurtosis on hedging decisions

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  • Jing-Yi Lai

Abstract

This study uses real price data rather than a simulation approach to investigate how hedging behaviours may change when hedgers consider skewness and excess kurtosis of hedging returns in their decision models. The study involves modelling the time-varying skewness and excess kurtosis of returns. The empirical results show that adding a preference for positively skewed returns to traditional mean-variance models may not lead to more speculative hedging/investment behaviours. Post-hedged return distributions suggest that the third moments of hedged portfolios have probably been well adjusted by mean-variance strategies, rendering three-moment decision models on a par with traditional mean-variance models. Additionally, considering the aversion to excess kurtosis will cause investors to hedge more. The research also provides empirical support for traditional minimum-variance strategies.

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  • Jing-Yi Lai, 2012. "An empirical study of the impact of skewness and kurtosis on hedging decisions," Quantitative Finance, Taylor & Francis Journals, vol. 12(12), pages 1827-1837, December.
  • Handle: RePEc:taf:quantf:v:12:y:2012:i:12:p:1827-1837
    DOI: 10.1080/14697688.2012.696677
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    File URL: http://hdl.handle.net/10.1080/14697688.2012.696677
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    References listed on IDEAS

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    1. John Cotter & Jim Hanly, 2012. "Hedging effectiveness under conditions of asymmetry," The European Journal of Finance, Taylor & Francis Journals, vol. 18(2), pages 135-147, February.
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