Commodity futures hedging, risk aversion and the hedging horizon. Issue 15 (7th December 2016)

• Record Type: Journal Article
• Authors: Conlon, Thomas; Cotter, John; Gençay, Ramazan
• Is Part Of: European journal of finance. Volume 22:Issue 15(2016)
• Page Start: 1534
• Page End: 1560
• Publication Date: 2016-12-07
• Subjects: commodity markets -- futures hedging -- risk aversion -- hedging horizon -- wavelet analysis -- selective hedging; Finance -- Periodicals; Finance -- Europe -- Periodicals; International finance -- Periodicals; 332.094
• DOI: 10.1080/1351847X.2015.1031912
• Languages: English
• ISSNs: 1351-847X

Abstract

Abstract : This paper examines the impact of management preferences on optimal futures hedging strategy and associated performance. Applying an expected utility hedging objective, the optimal futures hedge ratio is determined for a range of preferences on risk aversion, hedging horizon and expected returns. Empirical results reveal substantial hedge ratio variation across distinct management preferences and are supportive of the hedging policies of real firms. Hedging performance is further shown to be strongly dependent on underlying preferences. In particular, hedgers with high risk aversion and short horizon reduce hedge portfolio risk but achieve inferior utility in comparison to those with low aversion.