Abstract
In this paper we study a risk-minimizing hedge ratio with futures contracts, where the risk of the hedged portfolio is computed using a spectral risk measure, thus incorporating the degree of agent’s risk aversion. We empirically estimate the optimal hedge ratio using a long time series of UK and US equity indices, the EURUSD and EURGBP exchange rates, and the Brent crude oil. Comparing the results with common optimal hedge ratios (such as the minimum-variance, and the minimum-expected shortfall), we find that the agent’s risk aversion has a material impact, and we conclude that the risk aversion parameter cannot be ignored for risk management purposes.
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