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Article: Ambiguity and the Value of Hedging
Title | Ambiguity and the Value of Hedging |
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Authors | |
Issue Date | 2015 |
Publisher | John Wiley & Sons, Inc. The Journal's web site is located at http://www.interscience.wiley.com/jpages/0270-7314/ |
Citation | The Journal of Futures Markets, 2015, v. 35 n. 9, p. 839-848 How to Cite? |
Abstract | This paper examines the optimal production and hedging decisions of the competitive firm under price uncertainty when the firm's preferences exhibit smooth ambiguity aversion and an unbiased forward hedging opportunity is available. Ambiguity is modeled by a second-order probability distribution that captures the firm's uncertainty about which of the subjective beliefs govern the price risk. Ambiguity preferences are modeled by the (second-order) expectation of a concave transformation of the (first-order) expected utility of profit conditional on each plausible subjective distribution of the price risk. Within this framework, the separation and full-hedging theorems remain intact. Banning the firm from trading its output forward at the unbiased forward price has adverse effect on the firm's production decision. The firm finds the unbiased forward hedging opportunity more valuable in the presence than in the absence of ambiguity. Furthermore, the value of hedging increases when the firm's beliefs are more ambiguous, or when the firm becomes more ambiguity averse. |
Persistent Identifier | http://hdl.handle.net/10722/214694 |
ISSN | 2023 Impact Factor: 1.8 2023 SCImago Journal Rankings: 0.672 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Wong, KP | - |
dc.date.accessioned | 2015-08-21T11:51:53Z | - |
dc.date.available | 2015-08-21T11:51:53Z | - |
dc.date.issued | 2015 | - |
dc.identifier.citation | The Journal of Futures Markets, 2015, v. 35 n. 9, p. 839-848 | - |
dc.identifier.issn | 0270-7314 | - |
dc.identifier.uri | http://hdl.handle.net/10722/214694 | - |
dc.description.abstract | This paper examines the optimal production and hedging decisions of the competitive firm under price uncertainty when the firm's preferences exhibit smooth ambiguity aversion and an unbiased forward hedging opportunity is available. Ambiguity is modeled by a second-order probability distribution that captures the firm's uncertainty about which of the subjective beliefs govern the price risk. Ambiguity preferences are modeled by the (second-order) expectation of a concave transformation of the (first-order) expected utility of profit conditional on each plausible subjective distribution of the price risk. Within this framework, the separation and full-hedging theorems remain intact. Banning the firm from trading its output forward at the unbiased forward price has adverse effect on the firm's production decision. The firm finds the unbiased forward hedging opportunity more valuable in the presence than in the absence of ambiguity. Furthermore, the value of hedging increases when the firm's beliefs are more ambiguous, or when the firm becomes more ambiguity averse. | - |
dc.language | eng | - |
dc.publisher | John Wiley & Sons, Inc. The Journal's web site is located at http://www.interscience.wiley.com/jpages/0270-7314/ | - |
dc.relation.ispartof | The Journal of Futures Markets | - |
dc.rights | The Journal of Futures Markets. Copyright © John Wiley & Sons, Inc. | - |
dc.rights | This is the peer reviewed version of the following article: The Journal of Futures Markets, 2015, v. 35 n. 9, p. 839-848 which has been published in final form at DOI: 10.1002/fut.21678 | - |
dc.title | Ambiguity and the Value of Hedging | - |
dc.type | Article | - |
dc.identifier.email | Wong, KP: kpwongc@hkucc.hku.hk | - |
dc.identifier.authority | Wong, KP=rp01112 | - |
dc.description.nature | postprint | - |
dc.identifier.doi | 10.1002/fut.21678 | - |
dc.identifier.scopus | eid_2-s2.0-84937738469 | - |
dc.identifier.hkuros | 246998 | - |
dc.identifier.volume | 35 | - |
dc.identifier.issue | 9 | - |
dc.identifier.spage | 839 | - |
dc.identifier.epage | 848 | - |
dc.identifier.isi | WOS:000358445900003 | - |
dc.publisher.place | United States | - |
dc.identifier.issnl | 0270-7314 | - |