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Production and hedging decisions under regret aversion

Xu Guo (), Wing-Keung Wong (), Qunfang Xu and Xuehu Zhu

Economic Modelling, 2015, vol. 51, issue C, 153-158

Abstract: In this paper, we investigate regret-averse firms' production and hedging behaviors. We first show that the separation theorem is still alive under regret aversion by proving that regret aversion is independent of the level of optimal production. On the other hand, we find that the full-hedging theorem does not always hold under regret aversion as the regret-averse firms take hedged positions different from those of risk-averse firms in some situations. With more regret aversion, regret-averse firms will hold smaller optimal hedging positions in an unbiased futures market. Furthermore, contrary to the conventional expectations, we show that banning firms from forward trading affects their production level in both directions.

Keywords: Production; Hedging; Regret aversion; Risk aversion; Competitive firms (search for similar items in EconPapers)
JEL-codes: D21 D24 D81 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.econmod.2015.08.007

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