2011 AAEA & NAREA Joint Annual Meeting
July 24–26, 2011
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 should not increase solely due to increases 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.
Copyright 2011 by Kauffman, Hayes, and Lence. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies
Kauffman, Hayes, and Lence
Kauffman, Nathan S.; Hayes, Dermot J.; and Lence, Sergio H., "The Impact of Price-Induced Hedging Behavior on Commodity Market Volatility" (2011). Economics Presentations, Posters and Proceedings. 6.