Probability Distortion and Loss Aversion in Futures Hedging

We analyze how the introduction of probability distortion and loss aversion in the standard hedging problem changes the optimal hedge ratio. Based on simulated cash and futures prices for soybeans, our results indicate that the optimal hedge changes considerably when probability distortion is considered. However, the impact of loss aversion on hedging decisions appears to be small, and it diminishes as loss aversion increases. Our findings suggest that probability distortion is a major driving force in hedging decisions, while loss aversion plays just a marginal role.


Subject(s):
Issue Date:
2006
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/18992
Total Pages:
16
Series Statement:
2006 Conference, St. Louis, MO, April 17-18, 2006




 Record created 2017-04-01, last modified 2017-08-24

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