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

  • Jing-Yi Lai
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    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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    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 12 (2012)
    Issue (Month): 12 (December)
    Pages: 1827-1837

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    Handle: RePEc:taf:quantf:v:12:y:2012:i:12:p:1827-1837
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