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

Nathan Kauffman and Dermot Hayes

No 103242, 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania from Agricultural and Applied Economics Association

Abstract: 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 is not affected solely due to changes 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.

Keywords: Agribusiness; Institutional and Behavioral Economics; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 32
Date: 2011
New Economics Papers: this item is included in nep-agr, nep-cmp and nep-evo
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Citations: View citations in EconPapers (2)

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Working Paper: The Impact of Price-Induced Hedging Behavior on Commodity Market Volatility (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea11:103242

DOI: 10.22004/ag.econ.103242

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