Conference Proceedings


Jim Hanly
John Cotter



hedging forecasting energy industries g15 g10 g12 risk aversion risk management hedging finance energy

Time varying risk aversion : an application toenergy hedging (2009)

Abstract Risk aversion is a key element of utility maximizing hedge strategies; however, it has typically been assigned an arbitrary value in the literature. This paper instead applies a GARCH-in-Mean (GARCH-M) model to estimate a time-varying measure of risk aversion that is based on the observed risk preferences of energy hedging market participants. The resulting estimates are applied to derive explicit risk aversion based optimal hedge strategies for both short and long hedgers. Out-of-sample results are also presented based on a unique approach that allows us to forecast risk aversion, thereby estimating hedge strategies that address the potential future needs of energy hedgers. We find that the risk aversion based hedges differ significantly from simpler OLS hedges. When implemented in-sample, risk aversion hedges for short hedgers outperform the OLS hedge ratio in a utility based comparison.
Collections Ireland -> University College Dublin -> Business Research Collection
Ireland -> University College Dublin -> Institutes and Centres
Ireland -> University College Dublin -> School of Business
Ireland -> University College Dublin -> Financial Mathematics Computation Cluster
Ireland -> University College Dublin -> FMC² Research Collection
Ireland -> University College Dublin -> College of Business

Full list of authors on original publication

Jim Hanly, John Cotter

Experts in our system

Jim Hanly
University College Dublin
Total Publications: 16
John Cotter
University College Dublin
Total Publications: 93