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A Behavioural Approach towards Futures Contract Usage

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  • Pennings, Joost M E
  • Leuthold, Raymond M

Abstract

We propose a behavioural decision-making model to investigate what factors, observable as well as unobservable, owner-managers consider regarding futures contract usage. The conceptual model consists of two phases, reflecting the two-stage decision structure of manager's use of futures. In the first phase owner-managers consider whether futures are within the market choice set for the enterprise. In the second phase the owner-manager decides whether or not to initiate a futures position when confronted with a concrete choice situation. In both phases owner-manager's beliefs and perceptions play an important role. The proposed model is tested on a data set of Dutch farmers, based on computer-assisted personal interviews. Because we incorporate latent variables (e.g., perceptions and beliefs) in both phases, we propose an estimation procedure that takes the measurement error of these latent variables explicitly into account. The implications of the behavioural decision-making model for futures contract design are derived. Copyright 2001 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Australian Economic Papers.

Volume (Year): 40 (2001)
Issue (Month): 4 (December)
Pages: 461-78

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Handle: RePEc:bla:ausecp:v:40:y:2001:i:4:p:461-78

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  1. Pennings, Joost M.E. & Garcia, Philip, 2001. "Unobserved Heterogeneity: Evidence and Implications for SMEs' Hedging Behavior," 2001 Conference, April 23-24, 2001, St. Louis, Missouri 18955, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  2. Joost M.E. Pennings & Raymond M. Leuthold, 2000. "The Role of Farmers' Behavioral Attitudes and Heterogeneity in Futures Contracts Usage," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 908-919.
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Cited by:
  1. Pennings, Joost M.E. & Isengildina, Olga & Irwin, Scott H. & Good, Darrel L. & Garcia, Philip & Frank, Julieta & Kuiper, W. Erno, 2005. "Complex Choices: Producers Risk Management Strategies," 2005 Annual meeting, July 24-27, Providence, RI 19550, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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