Dynamic Decision Making in Agricultural Futures and Options Markets

Fabio Mattos, Philip Garcia and Joost Pennings ()

No 37605, 2008 Conference, April 21-22, 2008, St. Louis, Missouri from NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: This paper investigates the dynamics of sequential decision-making in agricultural futures and options markets. Analysis of trading records of 12 traders identified considerable heterogeneity in individual dynamic trading behavior. Using risk measures derived from the deltas and vegas of trader’s portfolios, we find nearly half the traders behavior is consistent with a house-money effect and the other half with loss aversion. These findings correspond closely to expected behavior inferred from elicited utility and probability weighting functions. The results call into question more aggregate findings that discount probability weighting to develop risk measures which support the notion of more uniform, less heterogeneous, behavior. Understanding behavior in a prospect theory context appears to call for investigation of both the probability weighting and utility functions. Our findings also suggest that strategies for loss-averse traders who consolidate gains and avoid using gains in risk-seeking market activities are effective.

Keywords: Agricultural; Finance (search for similar items in EconPapers)
Pages: 15
Date: 2008
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:nccest:37605

DOI: 10.22004/ag.econ.37605

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