Working Paper


John Cotter
Thomas Conlon



futures hedging hedging horizon wavelets mathematics energy hedging financial risk management hedging finance wavelet transform downside risk

Downside Risk and the Energy Hedger’s Horizon (2012)

Abstract In this paper, we explore the impact of investor time-horizon on an optimal downside hedged energy portfolio.Previous studies have shown that minimum-variance hedging effectiveness improves for longer horizons usingvariance as the performance metric. This paper investigates whether this result holds for different hedging objectivesand effectiveness measures. A wavelet transform is applied to calculate the optimal heating oil hedge ratiousing a variety of downside objective functions at different time-horizons. We demonstrate decreased hedgingeffectiveness for increased levels of uncertainty at higher confidence intervals. Moreover, for each of the differenthedging objectives and effectiveness measures studied, we also demonstrate increasing hedging effectiveness atlonger horizons. While small differences in effectiveness are found across the different hedging objectives, time horizoneffects are found to dominate confirming the importance of considering the hedgers horizon. The findingssuggest that while downside risk measures are useful in the computation of an optimal hedge ratio that accountsfor unwanted negative returns, hedging horizon and confidence intervals should also be given careful considerationby the energy hedger.
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

John Cotter, Thomas Conlon

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John Cotter
University College Dublin
Total Publications: 93
Thomas Conlon
University College Dublin
Total Publications: 9