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The determination of an optimal hedge ratio and a generalized measure of risk

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The determination of an optimal hedge ratio and a generalized measure of risk

Li, Gang (2006) The determination of an optimal hedge ratio and a generalized measure of risk. Masters thesis, Concordia University.

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Abstract

The use of futures contracts as hedging instruments to reduce risk has been the focus of much research. Various risk measures have been developed and have subsequently been employed in an effort to create hedging strategies and to calculate optimal hedge ratios. This thesis proposes a more generalized risk model to measure the risk of hedged assets. The five-parameter model presented herein assumes that each investor has a different target return, level of risk aversion, and degree of sensitivity to lower and higher partial moments. The optimal hedging activity for each investor should then seek to minimize the unique generalized risk measure. This paper utilizes an out-of-sample test on a hedged position in the S&P500 index in the period from December 1982 to December 2004. Tests are conducted to determine whether the change of target returns and sensitivity parameters will affect optimal hedge ratios. In addition, whether hedging effectiveness changes significantly in-sample versus out-of-sample, and between each model and a naïve hedging strategy is investigated. Also, mean returns of hedged portfolios are compared for various models. This thesis makes three important contributions. First, this study is the first to implement both higher and lower partial moments in the determination of optimal hedge ratios. Second, an out-of-sample test is considered while most studies use only in-sample tests. Third, this thesis is the first to use discontinuous sample periods to separate market conditions and to analyze hedging performance in bull and bear markets

Divisions:Concordia University > John Molson School of Business
Item Type:Thesis (Masters)
Authors:Li, Gang
Pagination:vii, 46 leaves : ill. ; 29 cm.
Institution:Concordia University
Degree Name:M. Sc. Admin.
Program:John Molson School of Business
Date:2006
Thesis Supervisor(s):Rakita, Ian
ID Code:8870
Deposited By:Concordia University Libraries
Deposited On:18 Aug 2011 14:38
Last Modified:18 Aug 2011 15:05
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