Probability weighting and loss aversion in futures hedging

Mattos, Fabio; Garcia, Philip; Pennings, J.M.E.

doi:10.1016/j.finmar.2008.04.002

Cited by 23 publications

(10 citation statements)

References 44 publications

(75 reference statements)

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“…Assuming PT instead of EU potentially leads to a very different understanding of farmers' decisions (e.g. Tuthill and Frechette, 2004;Mattos, Garcia and Pennings, 2008). In addition, PT fits the agricultural context particularly well.…”

Section: Introductionmentioning

confidence: 99%

Expected utility or prospect theory maximisers? Assessing farmers' risk behaviour from field-experiment data

Bocquého

Jacquet

Reynaud

2013

European Review of Agricultural Economics

134

152

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We elicit the risk preferences of a sample of French farmers in a field-experiment setting, considering both expected utility and cumulative prospect theory. Under the EU framework, our results show that farmers are characterised by a concave utility function for gain outcomes implying risk aversion. The CPT framework confirms this result, but also suggests that farmers are twice as sensitive to losses as to gains and tend to pay undue attention to unlikely extreme outcomes. Accounting for loss aversion and probability weighting can make a difference in the design of effective and efficient policies, contracts or insurance schemes.

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Section: Introductionmentioning

confidence: 99%

Expected utility or prospect theory maximisers? Assessing farmers' risk behaviour from field-experiment data

Bocquého

Jacquet

Reynaud

2013

European Review of Agricultural Economics

134

152

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“…Mattos et al (2008) expand on this result by also allowing for subjective probability weighting together with loss aversion. Employing numerical simulations, Mattos et al (2008) show that the optimal hedge ratio decreases as the degree of loss aversion increases, as risk seeking behavior increases, or as the parameter of subjective probability weighting decreases.…”

Section: Optimal Producer Futures Hedgingmentioning

confidence: 94%

“…Mean-variance utility provides another widely used form through which analytical results are easily obtained (Turnovsky, 1983;Rolfo, 1980). Constant absolute risk aversion (CARA) represents a unique form of utility that is often used in the literature due to its tractability in generating closed form analytical solutions (Lapan & Moschini, 1994;Lence, 1995;Lien, 2001;Mattos, Garcia, & Pennings, 2008). When closed form expressions are unattainable, one must employ numerical estimation procedures to determine the optimal futures hedge (Cecchetti, Cumby, & Figlewski, 1988;Baillie & Myers, 1991).…”

Section: Optimal Producer Futures Hedgingmentioning

confidence: 99%

“…Three papers that have attempted to do so are those of Albuquerque (1999), Lien (2001) , and Mattos et al (2008). Albuquerque (1999) applies prospect theory in the context of a loss averse firm seeking to determine an optimal currency hedge, specifically the implications of managing downside risk, compared with a conventional firm that is not loss averse.…”

Section: Optimal Producer Futures Hedgingmentioning

confidence: 99%

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

Hayes

Kauffman

2011

SSRN Journal

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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. AbstractThe 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.

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“…On the contrary, Schroeder et al (1998) find that both producers and extension economists perceive forward contracts as more price-enhancing than risk-reducing and believe in the existence of market timing strategies, even though these strategies have little support in the literature (Irwin et al 2006). This rising number of empirical anomalies has led to exploration of alternative theoretical frameworks (e.g., Collins, Musser, and Mason 1991;Musser, Patrick, and Eckman 1996;Lien 2001;Mattos, Garcia, and Pennings 2008;Kim, Brorsen, and Anderson 2010). The central feature of most alternative utility theories is reference-dependence.…”

Section: Previous Work On Hedgingmentioning

confidence: 99%

Three essays on commodity markets

Li¹

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This article reconciles theories of firm pricing behavior when a cooperative and noncooperative firm engage in competition for grain. Standard theoretical models of firm behavior require the researcher to choose an operational motive for the firm, and a standard assumption is profit maximization. The unique governance and economic participation features of cooperatives suggest, however, that not only is profit maximization an unlikely objective, choosing a single objective for a cooperative firm may not be appropriate. A cooperative's objective reflects the degree to which it is integrated with its member-owners, thus integrating buyers and sellers. We propose a theoretical model of duopsony under uncertainty from which the pricing behaviors and market share outcomes of cooperative firms with their investor-owned counterparts can be compared. Our specific focus is on characterizing the market equilibriums for the cooperative firm with varying degrees of integration with its member producers.

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Probability weighting and loss aversion in futures hedging

Cited by 23 publications

References 44 publications

Expected utility or prospect theory maximisers? Assessing farmers' risk behaviour from field-experiment data

Expected utility or prospect theory maximisers? Assessing farmers' risk behaviour from field-experiment data

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

Three essays on commodity markets

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