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Article: Hedging and the competitive firm under correlated price and background risk

TitleHedging and the competitive firm under correlated price and background risk
Authors
KeywordsBackground Risk
Expectation Dependence
Hedging
Production
Issue Date2014
PublisherSpringer-Verlag Italia Srl. The Journal's web site is located at http://www.springer.it/libri_libro.asp?id=205
Citation
Decisions In Economics And Finance, 2014, v. 37, p. 329-340 How to Cite?
AbstractThis paper examines the behavior of the competitive firm under correlated price and background risk when a futures market exists for hedging purposes. We show that imposing the background risk, be it additive or multiplicative, on the firm has no effect on the separation theorem. The full-hedging theorem, however, holds if the background risk is independent of the price risk. In the general case of the correlated price and background risk, we adopt the concept of expectation dependence to describe the bivariate dependence structure. When the background risk is additive, the firm finds it optimal to opt for an over-hedge or an under-hedge, depending on whether the price risk is positively or negatively expectation dependent on the background risk, respectively. When the background risk is multiplicative, both the concept of expectation dependence and the Arrow-Pratt measure of relative risk aversion are called for to determine the firm's optimal futures position. © 2012 The Author(s).
Persistent Identifierhttp://hdl.handle.net/10722/177806
ISSN
2015 SCImago Journal Rankings: 0.167

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_US
dc.date.accessioned2012-12-19T09:39:57Z-
dc.date.available2012-12-19T09:39:57Z-
dc.date.issued2014en_US
dc.identifier.citationDecisions In Economics And Finance, 2014, v. 37, p. 329-340en_US
dc.identifier.issn1593-8883en_US
dc.identifier.urihttp://hdl.handle.net/10722/177806-
dc.description.abstractThis paper examines the behavior of the competitive firm under correlated price and background risk when a futures market exists for hedging purposes. We show that imposing the background risk, be it additive or multiplicative, on the firm has no effect on the separation theorem. The full-hedging theorem, however, holds if the background risk is independent of the price risk. In the general case of the correlated price and background risk, we adopt the concept of expectation dependence to describe the bivariate dependence structure. When the background risk is additive, the firm finds it optimal to opt for an over-hedge or an under-hedge, depending on whether the price risk is positively or negatively expectation dependent on the background risk, respectively. When the background risk is multiplicative, both the concept of expectation dependence and the Arrow-Pratt measure of relative risk aversion are called for to determine the firm's optimal futures position. © 2012 The Author(s).en_US
dc.languageengen_US
dc.publisherSpringer-Verlag Italia Srl. The Journal's web site is located at http://www.springer.it/libri_libro.asp?id=205en_US
dc.relation.ispartofDecisions in Economics and Financeen_US
dc.rightsThe original publication is available at www.springerlink.com-
dc.subjectBackground Risken_US
dc.subjectExpectation Dependenceen_US
dc.subjectHedgingen_US
dc.subjectProductionen_US
dc.titleHedging and the competitive firm under correlated price and background risken_US
dc.typeArticleen_US
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_US
dc.identifier.authorityWong, KP=rp01112en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1007/s10203-012-0137-3en_US
dc.identifier.scopuseid_2-s2.0-84908081347en_US
dc.identifier.hkuros241196-
dc.identifier.spage329en_US
dc.identifier.epage340en_US
dc.publisher.placeItalyen_US
dc.identifier.scopusauthoridWong, KP=7404759417en_US
dc.identifier.citeulike11465225-

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