Separation and Hedging Results with State-Contingent Production
AbstractA state-contingent model of production under uncertainty is developed and compared with more traditional models of production under uncertainty. Producer behavior with both production and price risk, in the presence and in the absence of futures and forward markets, is analyzed in this state-contingent framework. Conditions for the optimal hedge to be positive or negative are derived. The authors also show that, under plausible conditions, a risk-averse producer facing price uncertainty and the ability to hedge price risk will never willingly adopt a non-stochastic technology. New separation results, which hold in the presence of both price and production risk, are then developed. These separation results generalize Townsend's spanning results by reducing the number of necessary forward markets by one. Copyright 1997 by The London School of Economics and Political Science
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Bibliographic InfoArticle provided by London School of Economics and Political Science in its journal Economica.
Volume (Year): 64 (1997)
Issue (Month): 254 (May)
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Other versions of this item:
- Chambers, R.G. & Quiggin, J., 1995. "Separation and Hedging Results with State-Contingent Production," Papers 293, Australian National University - Department of Economics.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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- Wong, Kit Pong, 2006. "The effects of abandonment options on operating leverage and forward hedging," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 72-86.
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