We compare the performance of various hedging strategies for index collateralized debt obligation (CDO) tranches across a variety of models and hedging methods during the recent credit crisis. Our empirical analysis shows evidence for market incompleteness: a large proportion of risk in the CDO tranches appears to be unhedgeable. We also show that, unlike what is commonly assumed, dynamic model...

This paper empirically tests the determinants of foreign currency hedging using a large sample of UK non-financial firms. I find, unlike similar studies using US data, strong evidence of a relationship between expected financial distress costs and the foreign currency hedging decision and more significantly the foreign currency only hedging decision. This contrast in the findings between this s...

The incentive on an electricity generating firm to exercise market power depends strongly on the volume the firm has pre-sold in the forward or hedge markets. Therefore, in order to forecast the effect of mergers and other market developments on market power outcomes, it is essential to model the hedging decisions of dominant generating firms. This paper shows that a dominant firm’s profit-maxi...

In this paper, we consider the problem of mean-variance hedging in an incomplete market where the underlying assets are jump diffusion processes which are driven by Brownian motion and doubly stochastic Poisson processes. This problem is formulated as a stochastic control problem and closed form expressions for the optimal hedging policy are obtained using methods from stochastic control and th...

In this study, optimal operation of a reservoir by incorporation the hedging policy and Bat Algorithm (BA) is investigated. The deficit in water supply dam minimized as objective function monthly releases from are determined compared three hedging-based rules. first rule, which has single decision variable, constant release considered for all 240 months period. second scenario, one fixed each m...

During the recent European sovereign debt crisis, returns on EMU government bond portfolios experienced substantial volatility clustering, leptokurtosis and skewed returns, as well as correlation spikes. Asset managers invested in European government bonds had to derive new hedging strategies to deal with the changing return properties and the higher level of uncertainty. In this market environ...

This article investigates the optimal crop planting schedule and hedging strategy in the mean return versus CVaR risk framework. Crop insurances and futures contracts are available for hedging against yield and price risks. The impact of the ENSO-based climate forecast on the optimal production and hedging decision is examined. Gaussian copula is applied in simulating the scenarios of correlate...

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and infe...

In this paper we study the dynamic hedging problem using three different utility specifications: stochastic differential utility, terminal wealth utility, and a new utility transformation which includes features from the two previous approaches. In all three cases, we assume Markovian prices. While stochastic differential utility (SDU) has an ambiguous effect on the pure hedging demand, it does...

In this paper we study the hedging of derivatives in illiquid markets. More specifically we consider a model where the implementation of a hedging strategy affects the price of the underlying security. Following earlier work we characterize perfect hedging strategies by a nonlinear version of the Black-Scholes PDE. The core of the paper consists of a simulation study. We present numerical resul...