The traditional hedging model revisited with a non-observable convenience yield

Constantin Mellios and Pierre Six
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Pierre Six: Pôle Finance Responsable - Rouen Business School - Rouen Business School

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Abstract: This article examines the hedging of constrained commodity positions with futures contracts. We extend the study of Adler and Detemple (1988 a,b) to include a partial information framework where the convenience yield is not observable. As a consequence, futures prices depend on investor's beliefs regarding the value of the convenience yield, and every component of the hedge is impacted by thee beliefs. We achieve a decomposition of the demand that clarifies the impact on the optimal hedge of the beliefs, the spot price and the risk-free rate. This decomposition is crucial to understand our example that examines the case of the copper market.

Keywords: partial information; hedging demand; convenience yield; commodity futures markets; market prices of risk; interest rates (search for similar items in EconPapers)
Date: 2011-11
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Citations: View citations in EconPapers (4)

Published in Financial Review, 2011, Vol. 46 (Issue 4), pp. 569-593. ⟨10.1111/j.1540-6288.2011.00312.x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00659232

DOI: 10.1111/j.1540-6288.2011.00312.x

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