Probability Distortion and Loss Aversion in Futures Hedging

F. Mattos, P. Garcia, J.M.E. Pennings

Research output: Contribution to conferenceConference paperAcademicpeer-review

Abstract

We analyze how the introduction of probability distortion and loss aversion in the standard hedging problem changes the optimal hedge ratio. Based on simulated cash and futures prices for soybeans, our results indicate that the optimal hedge changes considerably when probability distortion is considered. However, the impact of loss aversion on hedging decisions appears to be small, and it diminishes as loss aversion increases. Our findings suggest that probability distortion is a major driving force in hedging decisions, while loss aversion plays just a marginal role.
Original languageEnglish
Number of pages16
Publication statusPublished - 2006
EventNCCC-134 Conference: Applied Commodity Price Analysis, Forecasting, and Market Risk Management -
Duration: 17 Apr 200618 Apr 2006

Conference

ConferenceNCCC-134 Conference: Applied Commodity Price Analysis, Forecasting, and Market Risk Management
Period17/04/0618/04/06

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