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A value-at-risk approach to futures hedge

Published online by Cambridge University Press:  23 June 2022

Wan-Yi Chiu Open the ORCID record for Wan-Yi Chiu [Opens in a new window]
Wan-Yi Chiu*
Affiliation:
Department of Finance, National United University, Taiwan, Republic of China. E-mail: wychiu@nuu.edu.tw
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Abstract

This paper examines the value-at-risk (VaR) implications of mean-variance hedging. We derive an equivalence between the VaR-based hedge and the mean-variance hedging. This method transfers the investor's subjective risk-aversion coefficient into the estimated VaR measure. As a result, we characterize the collapse probability bounds under which the VaR-based hedge could be insignificantly different from the minimum-variance hedge in the presence of estimation risk. The results indicate that the squared information ratio of futures returns is the primary factor determining the difference between the minimum-variance and VaR-based hedges.

Keywords

Mean-varianceRisk aversionSafety-firstUtilityValue-at-risk
Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 37 , Issue 3 , July 2023 , pp. 818 - 832
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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