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Performance of Utility Based Hedges

  • John Cotter

    (UCD School of Business, University College Dublin)

  • Jim Hanly

    (UCD School of Business, University College Dublin)

Hedgers as investors are concerned with both risk and return; however the literature has generally neglected the role of both returns and investor risk aversion by its focus on minimum variance hedging. In this paper we address this by using utility based performance metrics to evaluate the hedging effectiveness of utility based hedges for hedgers with both moderate and high risk aversion together with the more traditional minimum variance approach. We apply our approach to two asset classes, equity and energy, for three different hedging horizons, daily,weekly and monthly. We find significant differences between the minimum variance and utility based hedges and their attendant performance in-sample for all frequencies. However out of sample performance differences persist for the monthly frequency only.

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File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201404.pdf
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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201404.

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Length: 24 pages
Date of creation: 19 Feb 2014
Date of revision:
Handle: RePEc:ucd:wpaper:201404
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