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We examine whether hedging effectiveness is affected by asymmetry in thereturn distribution by applying tail specific metrics to compare the hedgingeffectiveness of short and long hedgers using crude oil futures contracts. Themetrics used include Lower Partial Moments (LPM), Value at Risk (VaR) andConditional Value at Risk (CVAR). Comparisons are applied to a number ofhedging strategies including OLS and both Symmetric and Asymmetric GARCHmodels. Our findings show that asymmetry reduces in-sample hedging performanceand that there are significant differences in hedging performance between shortand long hedgers. Thus, tail specific performance metrics should be applied inevaluating hedging effectiveness. We also find that the Ordinary Least Squares(OLS) model provides consistently good performance across different measures ofhedging effectiveness and estimation methods irrespective of thecharacteristics of the underlying distribution.

Hedging Effectiveness under Conditions of Asymmetry