The Impact of Price-Induced Hedging Behavior on Commodity Market Volatility

The utility maximization problem of a grain producer is formulated and solved numerically under prospect theory as an alternative to expected utility theory. Conventional theory posits that the optimal hedging position of a producer is not affected solely due to changes in the level of futures prices. However, a strong degree of positive correlation is apparent in the data. Our results show that with prospect theory serving as the underlying behavioral framework, the optimal hedge of a producer is affected by changes in futures price levels. The implications of this price-induced hedging behavior on spot prices and volatility are subsequently considered.


Issue Date:
2011
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/103242
Total Pages:
32
JEL Codes:
D03; D81; G11; Q13
Series Statement:
Selected Paper
13555




 Record created 2017-04-01, last modified 2017-10-19

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