Probability Distortion and Loss Aversion in Futures Hedging Report as inadecuate

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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): Marketing

Issue Date: 2006

Publication Type: Conference Paper/ Presentation

PURL Identifier:

Total Pages: 16

Series Statement: 2006 Conference, St. Louis, MO, April 17-18, 2006

Record appears in: Regional Research Projects > NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management > 2006 Conference, April 17-18, 2006, St. Louis, Missouri

Author: Mattos, Fabio ; Garcia, Philip ; Pennings, Joost M.E.


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