Optimal Hedge Ratio Under a Subjective Re-Weighting of the Original Measure

In this paper we study a risk-minimizing hedge ratio with futures contracts, where the risk of the hedged portfolio is measured through 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 four liquid commodities, to represent different asset classes, i.e. Brent crude oil, corn, gold, and copper. 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 should not be ignored in risk management