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The Impact of Price-Induced Hedging Behavior on Commodity Market Volatility
Economics Presentations, Posters and Proceedings
  • Nathan S. Kauffman, Iowa State University
  • Dermot J. Hayes, Iowa State University
  • Sergio H. Lence, Iowa State University
Document Type
Conference Proceeding
2011 AAEA & NAREA Joint Annual Meeting
Publication Date
Conference Date
July 24–26, 2011
(40.44062479999999, -79.99588640000002)
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
Copyright Owner
Kauffman, Hayes, and Lence
File Format
Citation Information
Nathan S. Kauffman, Dermot J. Hayes and Sergio H. Lence. "The Impact of Price-Induced Hedging Behavior on Commodity Market Volatility" Pittsburgh, PA(2011)
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