Hedging and Value at Risk: A Semi-Parametric Approach

摘要

The non-normality of financial asset returns has important implications for hedging. In particular, in contrast with the unambiguous effect that minimum-variance hedging has on the standard deviation, it can actually increase the negative skew-ness and kurtosis of hedge portfolio returns. Thus, the reduction in Value at Risk (VaR) and Conditional Value at Risk (CVaR) that minimum-variance hedging generates can be significantly lower than the reduction in standard deviation. In this study, we provide a new, semi-parametric method of estimating minimum-VaR and minimum-CVaR hedge ratios based on the Cornish-Fisher expansion of the quantile of the hedged portfolio return distribution. Using spot and futures returns for the FTSE 100, FTSE 250, and FTSE Small Cap equity indices, the Euro/US Dollar exchange rate, and Brent crude oil, we find that the semipara-metric approach is superior to the standard minimum-variance approach, and to the nonparametric approach of Harris and Shen (2006). In particular, it providesrna greater reduction in both negative skewness and excess kurtosis, and consequently generates hedge portfolios that in most cases have lower VaR and CVaR.