The effects of skewness and kurtosis on production and hedging decisions: a Gram-Charlier expansion approach

Xuejun Jiang (), Lingju Cheng () and Xinjie Dai ()
Additional contact information
Xuejun Jiang: Southern University of Science and Technology
Lingju Cheng: Minjian University
Xinjie Dai: Fortress Investment Group

Financial Innovation, 2025, vol. 11, issue 1, 1-17

Abstract: Abstract In this study, we propose a Gram-Charlier expansion approach to investigate the impact of skewness and kurtosis on production and hedging decisions. Consistent with the existing literature, we find that skewness and kurtosis do not affect decisions regarding optimal production; however, they significantly influence optimal hedging decisions. We observe that positive skewness with platykurtic spot prices or negative skewness with leptokurtic spot prices often leads to over-hedging when the initial forward contract price exceeds its expected value. Conversely, under-hedging is expected when the initial forward contract price falls below its expected value. In other conditions, skewness can either promote or impede speculative future trading. Using the Gram-Charlier expansion of the spot price density function, we find that optimal future positions depend on forward prices, the hedgers’ risk preference, and the spot price distribution. Simulations validate our findings on the impact of skewness and kurtosis on future hedging. Finally, we analyze of a cotton storage and forward contracting dataset to illustrate the application of our methodology and support our theoretical results.

Keywords: Forward contract; Hedging; Skewness and kurtosis; Gram-Charlier distribution (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1186/s40854-024-00680-w Abstract (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:fininn:v:11:y:2025:i:1:d:10.1186_s40854-024-00680-w

Ordering information: This journal article can be ordered from
http://www.springer. ... nomics/journal/40589

DOI: 10.1186/s40854-024-00680-w

Access Statistics for this article

Financial Innovation is currently edited by J. Leon Zhao and Zongyi

More articles in Financial Innovation from Springer, Southwestern University of Finance and Economics
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().