A utility based approach to energy hedging

John Cotter, Jim Hanly

Research output: Contribution to journalArticlepeer-review

Abstract

A key issue in the estimation of energy hedges is the hedgers' attitude towards risk which is encapsulated in the form of the hedgers' utility function. However, the literature typically uses only one form of utility function such as the quadratic when estimating hedges. This paper addresses this issue by estimating and applying energy market based risk aversion to commonly applied utility functions including log, exponential and quadratic, and we incorporate these in our hedging frameworks. We find significant differences in the optimal hedge strategies based on the utility function chosen.

Original languageEnglish
Pages (from-to)817-827
Number of pages11
JournalEnergy Economics
Volume34
Issue number3
DOIs
Publication statusPublished - May 2012

Keywords

  • Energy
  • Forecasting
  • Hedging
  • Risk aversion
  • Risk management

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