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Papers by jim hanly

International Journal of Finance & Economics

This paper estimates and applies a risk management strategy for electricity spot exposures using ... more This paper estimates and applies a risk management strategy for electricity spot exposures using futures hedging. We apply our approach to three of the most actively traded European electricity markets, Nordpool, APXUK and Phelix. We compare both optimal hedging strategies and the hedging effectiveness of these markets for two hedging horizons, weekly and monthly using both Variance and Value at Risk (VaR). Our key finding is that electricity futures can effectively manage risk only for specific time periods when using hedging strategies that have been very successful in financial and other commodity markets. More generally they are ineffective as a risk management tool when compared with other energy assets. This is especially true at the weekly frequency. We also find significant differences in both the Optimal Hedge Ratios (OHR's) and the hedging effectiveness of the different electricity markets. Better performance is found for the Nordpool market, while the poorest performer in hedging terms is the Phelix market.

Energy Studies Review, 2021

Fossil fuels were exposed to a major shock during the Global Financial Crisis of 2007/08. This pa... more Fossil fuels were exposed to a major shock during the Global Financial Crisis of 2007/08. This paper examines the influence of Brent Crude Oil, Natural Gas and Coal on three major European power markets (APXUK, NordPool and Phelix) during this period of uncertainty. Both univariate and bivariate frameworks are employed to evaluate, short run, long run and asymmetric power market responses to fossil fuels behaviour. The results point to a stronger relationship between fossil fuel shocks and the APXUK market across all three generational fuels, while results for Phelix are significant only in the case of coal and crude oil. For the Nordic region there is no significant evidence of a causal effect between the power market and the broader energy markets. These findings highlight that the Nordic market appears to be insulated from fossil fuel shocks thanks to its strong focus on renewables, while APXUK and Phelix were significantly exposed to fossil fuels fluctuations.

This paper examines the volatility and covariance dynamics of cash and futures contracts that und... more This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term hedging horizon can be scaled and successfully applied to longer term horizons. We also test the equivalence of scaled hedge ratios with those calculated directly from lower frequency data and compare them in terms of hedging effectiveness. Our findings show that the volatility and covariance dynamics may differ considerably depending on the hedging horizon and this gives rise to significant differences between short term and longer term hedges. Despite this, scaling provides good hedging outcomes in terms of risk reduction which are comparable to those based on direct estimation.

Handbook of Energy Finance, 2020

Energy based assets are showing increased susceptibility to volatility arising out of geo-politic... more Energy based assets are showing increased susceptibility to volatility arising out of geo-political, economic, climate and technological events. Given the economic importance of energy products, their market participants need to be able to access efficient strategies to effectively manage their exposures and reduce price risk. This chapter will outline the key futures based hedging approaches that have been developed for managing energy price risk and evaluate their effectiveness. A key element of this analysis will be the breadth of assets considered. These include Crude and Refined Oil products, Natural Gas, and wholesale Electricity markets. We find significant differences in the hedging effectiveness of the different energy markets. A key finding is that, that Natural Gas and particularly electricity futures are relatively ineffective as a risk management tool when compared with other energy assets.

Economic and Social Review, 2019

Ireland’s National Renewable Energy Action plan addresses how it will meet its environmental comm... more Ireland’s National Renewable Energy Action plan addresses how it will meet its environmental commitments. One element of the strategy is the use and promotion of micro renewable energy systems (micro-RES). This paper profiles households that have adopted micro-RES and examines whether micro-RES installations have resulted in a reduction in energy consumption based on data from the Irish Household Budget Survey. Results indicate that the presence of micro-RES does not result in a reduction of electricity use, rather the opposite. Furthermore, our findings indicate that some revision of energy policy is needed, as the presence of micro-RES does not result in a decrease in total energy use.

This paper examines the volatility and covariance dynamics of cash and futures contracts that und... more This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term hedging horizon can be scaled and successfully applied to longer term horizons. We also test the equivalence of scaled hedge ratios with those calculated directly from lower frequency data and compare them in terms of hedging effectiveness. Our findings show that the volatility and covariance dynamics may differ considerably depending on the hedging horizon and this gives rise to significant differences between short term and longer term hedges. Despite this, scaling provides good hedging outcomes in terms of risk reduction which are comparable to those based on direct estimation.

Social Science & Medicine, 2020

Previous research suggests that mortality rates behave pro-cyclically with respect to economic gr... more Previous research suggests that mortality rates behave pro-cyclically with respect to economic growth, with suicides representing a notable exception that consistently increase in economic downturns. Over recent years, there is ample evidence in the literature that the working environment in the US has deteriorated significantly, suggesting that suicide rates may not necessarily behave in a counter-cyclical manner with business performance. Utilising recent suicide data, this study empirically tests the hypothesis that adverse working conditions over recent years may have resulted in a pro-cyclical relationship between business performance and suicide. Unlike previous studies, we use a stock market index, a leading macroeconomic indicator, to measure economic conditions from a business perspective. We employ the Autoregressive Distributed Lag (ARDL) co-integration methodology to study the long-run relationship between monthly S&P500 stock market data and age and gender-specific suicide rates during the period January 1999 to July 2017. Our results highlight substantial differences in age groups responses to fluctuations in business performance. We find a clear positive association between business performance and suicide rates for the youngest males and females aged 15-34 years, indicating that there is a human cost associated with improved business performance. Additionally, we investigate the association between economic insecurity, a unique aspect of the recent deterioration in the working environment, using the Implied Volatility Index "VIX" and age and gender-specific suicide rates. Our findings do not support a population-wide adverse impact of economic insecurity on suicide incidences. The exception was males aged 15-24, and females aged 55-64 for whom we find a significant positive association. Teaching work-life management and problem-solving skills to manage everyday work stressors may be important strategies to mitigate the psychological cost of business successes.

Journal of Applied Economics, 2019

In this paper we analyse a set of socially responsible investment (SRI) indices against their con... more In this paper we analyse a set of socially responsible investment (SRI) indices against their conventional counterparts in the US context. Using a data set that spans the Obama and Trump administrations, we aim to identify whether performance and volatility patterns differ when markets are exposed to political uncertainty and the Global Financial Crisis (GFC). The findings suggest that SRI indices underperform conventional indices, and that the S&P 500 has a significant impact on their behaviour. The CBOE's Volatility Index (VIX), the US Equity Related Economic Uncertainty Index (EEUi) and the impact of the economic policy uncertainty index (EPUi) are used to consider market volatility and political uncertainty, with VIX emerging as the best indicator to capture market uncertainty. The study signals a positive and significant impact on SRI indices during the first hundred days of the Obama administration with a lack of significant findings for the Trump administration for the period of study. The results for implied volatility reveal similar patterns across all indices.

Energy Policy, 2018

Solar photovoltaic (PV) systems have made it possible for home owners to retrofit their premises ... more Solar photovoltaic (PV) systems have made it possible for home owners to retrofit their premises to generate their own electricity, thus becoming more self-sufficient. Though, the increasing popularity of residential solar PV systems in electricity markets has led some (Cai, Adlakha, Low, De Martini, & Chandy, 2013) to suggest that it has created a positive feedback cycle or loop. Simply put a positive feedback cycle or loop is a situation where, action A generates more of action B which in turn generates more of action A. In economics a positive feedback cycle results in a systemic risk to the system (Rodrigues et al., 2016; Sahu, 2015).

Energy Policy, 2018

The liberalization process of European electricity markets has been a work in progress since earl... more The liberalization process of European electricity markets has been a work in progress since early reforms beginning in the 1990's. A key goal of these reforms was to enable increased integration and attendant efficiency within these markets. In this paper, we analyse three major European electricity markets-(APXUK, NordPool and Phelix)before and after the 2009/72/EC Directive was introduced, to examine the extent to which those markets are efficient and whether they have become more integrated. We find little evidence of significant long run relationships between the different markets. We also find that the NordPool and Phelix markets in particular exhibit volatility persistence and clustering behaviour that is inconsistent with the postulations of market efficiency. The existence of continued inefficiencies across these power markets indicates that the desired goal of achieving an efficient and unified electricity market in the EU context is still a work in progress.

SSRN Electronic Journal, 2016

Energy risk management through hedging has been the subject of increased focus in recent years gi... more Energy risk management through hedging has been the subject of increased focus in recent years given the importance of energy to the global economy and its increased susceptibility to volatility arising out of political, economic, climate and technological events. This volatility means

Derivative Securities Pricing and Modelling, 2012

We examine whether the hedging effectiveness of crude oil futures is affected by asymmetry in the... more We examine whether the hedging effectiveness of crude oil futures is affected by asymmetry in the return distribution by applying tail specific metrics to compare the hedging effectiveness of both short and long hedgers. The hedging effectiveness metrics we use are based on Lower Partial Moments (LPM), Value at Risk (VaR) and Conditional Value at Risk (CVaR). Comparisons are applied to a number of hedging strategies including OLS, and both Symmetric and Asymmetric GARCH models. We find that OLS provides consistently better performance across different measures of hedging effectiveness as compared with GARCH models, irrespective of the characteristics of the underlying distribution.

SSRN Electronic Journal, 2009

This paper examines the volatility and covariance dynamics of cash and futures contracts that und... more This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term hedging horizon can be scaled and successfully applied to longer term horizons. We also test the equivalence of scaled hedge ratios with those calculated directly from lower frequency data and compare them in terms of hedging effectiveness. Our findings show that the volatility and covariance dynamics may differ considerably depending on the hedging horizon and this gives rise to significant differences between short term and longer term hedges. Despite this, scaling provides good hedging outcomes in terms of risk reduction which are comparable to those based on direct estimation.

SSRN Electronic Journal, 2014

often represent preliminary work and are circulated to encourage discussion. Citation of such a p... more often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. Any opinions expressed here are those of the author(s) and not those of UCD Geary Institute. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions.

The European Journal of Finance, 2012

We examine whether hedging effectiveness is affected by asymmetry in the return distribution by a... more We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail specific metrics to compare the hedging effectiveness of short and long hedgers using crude oil futures contracts. The metrics used include Lower Partial Moments (LPM), Value at Risk (VaR) and Conditional Value at Risk (CVAR). Comparisons are applied to a number of hedging strategies including OLS and both Symmetric and Asymmetric GARCH models. Our findings show that asymmetry reduces in-sample hedging performance and that there are significant differences in hedging performance between short and long hedgers. Thus, tail specific performance metrics should be applied in evaluating hedging effectiveness. We also find that the Ordinary Least Squares (OLS) model provides consistently good performance across different measures of hedging effectiveness and estimation methods irrespective of the characteristics of the underlying distribution.

Journal of Futures Markets, 2006

Mixed results have been documented for the performance of hedging strategies using futures. This ... more Mixed results have been documented for the performance of hedging strategies using futures. This paper reinvestigates this issue using an extensive set of performance evaluation metrics across seven international markets. We compare the hedging performance of short and long hedgers using traditional variance based approaches together with modern risk management techniques including Value at Risk, Conditional Value at Risk and approaches based on Downside Risk. Our findings indicate that using these metrics to evaluate hedging performance, yields differences in terms of best hedging strategy as compared with the traditional variance measure. We also find significant differences in performance between short and long hedgers. These results are observed both in-sample and out-of-sample.

Energy Economics, 2010

Risk aversion is a key element of utility maximizing hedge strategies; however, it has typically ... more 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.

Energy Economics, 2012

A key issue in the estimation of energy hedges is the hedgers' attitude towards risk which is enc... more 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.

International Journal of Finance & Economics

This paper estimates and applies a risk management strategy for electricity spot exposures using ... more This paper estimates and applies a risk management strategy for electricity spot exposures using futures hedging. We apply our approach to three of the most actively traded European electricity markets, Nordpool, APXUK and Phelix. We compare both optimal hedging strategies and the hedging effectiveness of these markets for two hedging horizons, weekly and monthly using both Variance and Value at Risk (VaR). Our key finding is that electricity futures can effectively manage risk only for specific time periods when using hedging strategies that have been very successful in financial and other commodity markets. More generally they are ineffective as a risk management tool when compared with other energy assets. This is especially true at the weekly frequency. We also find significant differences in both the Optimal Hedge Ratios (OHR's) and the hedging effectiveness of the different electricity markets. Better performance is found for the Nordpool market, while the poorest performer in hedging terms is the Phelix market.

Energy Studies Review, 2021

Fossil fuels were exposed to a major shock during the Global Financial Crisis of 2007/08. This pa... more Fossil fuels were exposed to a major shock during the Global Financial Crisis of 2007/08. This paper examines the influence of Brent Crude Oil, Natural Gas and Coal on three major European power markets (APXUK, NordPool and Phelix) during this period of uncertainty. Both univariate and bivariate frameworks are employed to evaluate, short run, long run and asymmetric power market responses to fossil fuels behaviour. The results point to a stronger relationship between fossil fuel shocks and the APXUK market across all three generational fuels, while results for Phelix are significant only in the case of coal and crude oil. For the Nordic region there is no significant evidence of a causal effect between the power market and the broader energy markets. These findings highlight that the Nordic market appears to be insulated from fossil fuel shocks thanks to its strong focus on renewables, while APXUK and Phelix were significantly exposed to fossil fuels fluctuations.

This paper examines the volatility and covariance dynamics of cash and futures contracts that und... more This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term hedging horizon can be scaled and successfully applied to longer term horizons. We also test the equivalence of scaled hedge ratios with those calculated directly from lower frequency data and compare them in terms of hedging effectiveness. Our findings show that the volatility and covariance dynamics may differ considerably depending on the hedging horizon and this gives rise to significant differences between short term and longer term hedges. Despite this, scaling provides good hedging outcomes in terms of risk reduction which are comparable to those based on direct estimation.

Handbook of Energy Finance, 2020

Energy based assets are showing increased susceptibility to volatility arising out of geo-politic... more Energy based assets are showing increased susceptibility to volatility arising out of geo-political, economic, climate and technological events. Given the economic importance of energy products, their market participants need to be able to access efficient strategies to effectively manage their exposures and reduce price risk. This chapter will outline the key futures based hedging approaches that have been developed for managing energy price risk and evaluate their effectiveness. A key element of this analysis will be the breadth of assets considered. These include Crude and Refined Oil products, Natural Gas, and wholesale Electricity markets. We find significant differences in the hedging effectiveness of the different energy markets. A key finding is that, that Natural Gas and particularly electricity futures are relatively ineffective as a risk management tool when compared with other energy assets.

Economic and Social Review, 2019

Ireland’s National Renewable Energy Action plan addresses how it will meet its environmental comm... more Ireland’s National Renewable Energy Action plan addresses how it will meet its environmental commitments. One element of the strategy is the use and promotion of micro renewable energy systems (micro-RES). This paper profiles households that have adopted micro-RES and examines whether micro-RES installations have resulted in a reduction in energy consumption based on data from the Irish Household Budget Survey. Results indicate that the presence of micro-RES does not result in a reduction of electricity use, rather the opposite. Furthermore, our findings indicate that some revision of energy policy is needed, as the presence of micro-RES does not result in a decrease in total energy use.

This paper examines the volatility and covariance dynamics of cash and futures contracts that und... more This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term hedging horizon can be scaled and successfully applied to longer term horizons. We also test the equivalence of scaled hedge ratios with those calculated directly from lower frequency data and compare them in terms of hedging effectiveness. Our findings show that the volatility and covariance dynamics may differ considerably depending on the hedging horizon and this gives rise to significant differences between short term and longer term hedges. Despite this, scaling provides good hedging outcomes in terms of risk reduction which are comparable to those based on direct estimation.

Social Science & Medicine, 2020

Previous research suggests that mortality rates behave pro-cyclically with respect to economic gr... more Previous research suggests that mortality rates behave pro-cyclically with respect to economic growth, with suicides representing a notable exception that consistently increase in economic downturns. Over recent years, there is ample evidence in the literature that the working environment in the US has deteriorated significantly, suggesting that suicide rates may not necessarily behave in a counter-cyclical manner with business performance. Utilising recent suicide data, this study empirically tests the hypothesis that adverse working conditions over recent years may have resulted in a pro-cyclical relationship between business performance and suicide. Unlike previous studies, we use a stock market index, a leading macroeconomic indicator, to measure economic conditions from a business perspective. We employ the Autoregressive Distributed Lag (ARDL) co-integration methodology to study the long-run relationship between monthly S&P500 stock market data and age and gender-specific suicide rates during the period January 1999 to July 2017. Our results highlight substantial differences in age groups responses to fluctuations in business performance. We find a clear positive association between business performance and suicide rates for the youngest males and females aged 15-34 years, indicating that there is a human cost associated with improved business performance. Additionally, we investigate the association between economic insecurity, a unique aspect of the recent deterioration in the working environment, using the Implied Volatility Index "VIX" and age and gender-specific suicide rates. Our findings do not support a population-wide adverse impact of economic insecurity on suicide incidences. The exception was males aged 15-24, and females aged 55-64 for whom we find a significant positive association. Teaching work-life management and problem-solving skills to manage everyday work stressors may be important strategies to mitigate the psychological cost of business successes.

Journal of Applied Economics, 2019

In this paper we analyse a set of socially responsible investment (SRI) indices against their con... more In this paper we analyse a set of socially responsible investment (SRI) indices against their conventional counterparts in the US context. Using a data set that spans the Obama and Trump administrations, we aim to identify whether performance and volatility patterns differ when markets are exposed to political uncertainty and the Global Financial Crisis (GFC). The findings suggest that SRI indices underperform conventional indices, and that the S&P 500 has a significant impact on their behaviour. The CBOE's Volatility Index (VIX), the US Equity Related Economic Uncertainty Index (EEUi) and the impact of the economic policy uncertainty index (EPUi) are used to consider market volatility and political uncertainty, with VIX emerging as the best indicator to capture market uncertainty. The study signals a positive and significant impact on SRI indices during the first hundred days of the Obama administration with a lack of significant findings for the Trump administration for the period of study. The results for implied volatility reveal similar patterns across all indices.

Energy Policy, 2018

Solar photovoltaic (PV) systems have made it possible for home owners to retrofit their premises ... more Solar photovoltaic (PV) systems have made it possible for home owners to retrofit their premises to generate their own electricity, thus becoming more self-sufficient. Though, the increasing popularity of residential solar PV systems in electricity markets has led some (Cai, Adlakha, Low, De Martini, & Chandy, 2013) to suggest that it has created a positive feedback cycle or loop. Simply put a positive feedback cycle or loop is a situation where, action A generates more of action B which in turn generates more of action A. In economics a positive feedback cycle results in a systemic risk to the system (Rodrigues et al., 2016; Sahu, 2015).

Energy Policy, 2018

The liberalization process of European electricity markets has been a work in progress since earl... more The liberalization process of European electricity markets has been a work in progress since early reforms beginning in the 1990's. A key goal of these reforms was to enable increased integration and attendant efficiency within these markets. In this paper, we analyse three major European electricity markets-(APXUK, NordPool and Phelix)before and after the 2009/72/EC Directive was introduced, to examine the extent to which those markets are efficient and whether they have become more integrated. We find little evidence of significant long run relationships between the different markets. We also find that the NordPool and Phelix markets in particular exhibit volatility persistence and clustering behaviour that is inconsistent with the postulations of market efficiency. The existence of continued inefficiencies across these power markets indicates that the desired goal of achieving an efficient and unified electricity market in the EU context is still a work in progress.

SSRN Electronic Journal, 2016

Energy risk management through hedging has been the subject of increased focus in recent years gi... more Energy risk management through hedging has been the subject of increased focus in recent years given the importance of energy to the global economy and its increased susceptibility to volatility arising out of political, economic, climate and technological events. This volatility means

Derivative Securities Pricing and Modelling, 2012

We examine whether the hedging effectiveness of crude oil futures is affected by asymmetry in the... more We examine whether the hedging effectiveness of crude oil futures is affected by asymmetry in the return distribution by applying tail specific metrics to compare the hedging effectiveness of both short and long hedgers. The hedging effectiveness metrics we use are based on Lower Partial Moments (LPM), Value at Risk (VaR) and Conditional Value at Risk (CVaR). Comparisons are applied to a number of hedging strategies including OLS, and both Symmetric and Asymmetric GARCH models. We find that OLS provides consistently better performance across different measures of hedging effectiveness as compared with GARCH models, irrespective of the characteristics of the underlying distribution.

SSRN Electronic Journal, 2009

This paper examines the volatility and covariance dynamics of cash and futures contracts that und... more This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term hedging horizon can be scaled and successfully applied to longer term horizons. We also test the equivalence of scaled hedge ratios with those calculated directly from lower frequency data and compare them in terms of hedging effectiveness. Our findings show that the volatility and covariance dynamics may differ considerably depending on the hedging horizon and this gives rise to significant differences between short term and longer term hedges. Despite this, scaling provides good hedging outcomes in terms of risk reduction which are comparable to those based on direct estimation.

SSRN Electronic Journal, 2014

often represent preliminary work and are circulated to encourage discussion. Citation of such a p... more often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. Any opinions expressed here are those of the author(s) and not those of UCD Geary Institute. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions.

The European Journal of Finance, 2012

We examine whether hedging effectiveness is affected by asymmetry in the return distribution by a... more We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail specific metrics to compare the hedging effectiveness of short and long hedgers using crude oil futures contracts. The metrics used include Lower Partial Moments (LPM), Value at Risk (VaR) and Conditional Value at Risk (CVAR). Comparisons are applied to a number of hedging strategies including OLS and both Symmetric and Asymmetric GARCH models. Our findings show that asymmetry reduces in-sample hedging performance and that there are significant differences in hedging performance between short and long hedgers. Thus, tail specific performance metrics should be applied in evaluating hedging effectiveness. We also find that the Ordinary Least Squares (OLS) model provides consistently good performance across different measures of hedging effectiveness and estimation methods irrespective of the characteristics of the underlying distribution.

Journal of Futures Markets, 2006

Mixed results have been documented for the performance of hedging strategies using futures. This ... more Mixed results have been documented for the performance of hedging strategies using futures. This paper reinvestigates this issue using an extensive set of performance evaluation metrics across seven international markets. We compare the hedging performance of short and long hedgers using traditional variance based approaches together with modern risk management techniques including Value at Risk, Conditional Value at Risk and approaches based on Downside Risk. Our findings indicate that using these metrics to evaluate hedging performance, yields differences in terms of best hedging strategy as compared with the traditional variance measure. We also find significant differences in performance between short and long hedgers. These results are observed both in-sample and out-of-sample.

Energy Economics, 2010

Risk aversion is a key element of utility maximizing hedge strategies; however, it has typically ... more 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.

Energy Economics, 2012

A key issue in the estimation of energy hedges is the hedgers' attitude towards risk which is enc... more 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.