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Hedging Effectiveness under Conditions of Asymmetry

Author Info

  • John Cotter

    (University College Dublin)

  • Jim Hanly

    (Dublin Institute of Technology)

Abstract

We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail specific metrics to compare the hedging effectiveness of short and long hedgers using crude oil futures contracts. The metrics used include Lower Partial Moments (LPM), Value at Risk (VaR) and Conditional Value at Risk (CVAR). Comparisons are applied to a number of hedging strategies including OLS and both Symmetric and Asymmetric GARCH models. Our findings show that asymmetry reduces in-sample hedging performance and that there are significant differences in hedging performance between short and long hedgers. Thus, tail specific performance metrics should be applied in evaluating hedging effectiveness. We also find that the Ordinary Least Squares (OLS) model provides consistently good performance across different measures of hedging effectiveness and estimation methods irrespective of the characteristics of the underlying distribution.

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File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp200843.pdf
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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 200843.

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Length: 26 pages
Date of creation: 07 2011
Date of revision:
Handle: RePEc:ucd:wpaper:200843
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Keywords: Hedging Performance; Asymmetry; Lower Partial Moments; Value at Risk; Conditional Value at Risk.;

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Find related papers by JEL classification:
  • 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

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  16. Cotter, John & Hanly, James, 2005. "Re-evaluating Hedging Performance," MPRA Paper 3523, University Library of Munich, Germany.
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Cited by:

  1. Chuang, Chung-Chu & Wang, Yi-Hsien & Yeh, Tsai-Jung & Chuang, Shuo-Li, 2014. "Backtesting VaR in consideration of the higher moments of the distribution for minimum-variance hedging portfolios," Economic Modelling, Elsevier, vol. 42(C), pages 15-19.
  2. Bessler, Wolfgang & Wolff, Dominik, 2014. "Hedging European government bond portfolios during the recent sovereign debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 379-399.

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