Hedging Effectiveness under Conditions of Asymmetry

John Cotter

Research output: Contribution to journalArticlepeer-review

28 Citations (Scopus)

Abstract

We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail specific metrics, for example, Value at Risk, to compare the hedging effectiveness of short and long hedgers. Comparisons are applied to a number of hedging strategies including OLS, and both symmetric and asymmetric GARCH models. We apply our analysis to a dataset consisting of S&P500 index cash and futures containing symmetric and asymmetric return distributions chosen ex-post. Our findings show that asymmetry reduces out-of-sample hedging performance and that significant differences occur in hedging performance between short and long hedgers.
Original languageEnglish
JournalEuropean Journal of Finance
Volume18
Issue number2
DOIs
Publication statusPublished - 1 Jan 2012
Externally publishedYes

Keywords

  • hedging effectiveness
  • asymmetry
  • return distribution
  • Value at Risk
  • short hedgers
  • long hedgers
  • OLS
  • GARCH models
  • S&P500 index
  • cash and futures
  • out-of-sample performance

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