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How To Group Market Participants? Heterogeneity In Hedging Behavior

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  • Pennings, Joost M.E.
  • Garcia, Philip
  • Irwin, Scott H.
  • Good, Darrel L.

Abstract

Using a generalized mixture model, we model individual heterogeneity by identifying groups of participants that respond in a similar manner to the determinants of economic behavior. The procedure emphasizes the role of theory as the determinants of behavior are used to simultaneously explain market activities and to discriminate among groups of market participants. We show the appealing properties of this modeling approach by comparing it with two often used grouping methods in an empirical study in which we estimate the factors affecting market participants' hedging behavior.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2003 Annual meeting, July 27-30, Montreal, Canada with number 21963.

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Date of creation: 2003
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Handle: RePEc:ags:aaea03:21963

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Keywords: Institutional and Behavioral Economics;

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  1. Herrendorf, Berthold & Valentinyi, Akos & Waldmann, Robert, 2000. "Ruling Out Multiplicity and Indeterminacy: The Role of Heterogeneity," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 295-307, April.
  2. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  3. Green, Paul E & Carmone, Frank J & Wachspress, David P, 1976. " Consumer Segmentation via Latent Class Analysis," Journal of Consumer Research, University of Chicago Press, vol. 3(3), pages 170-74, December.
  4. G. David Haushalter, 2000. "Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 55(1), pages 107-152, 02.
  5. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February.
  6. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March.
  7. Pennings, Joost M. E. & Garcia, Philip, 2004. "Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 951-978, May.
  8. Jennifer Lynch Koski & Jeffrey Pontiff, 1999. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 54(2), pages 791-816, 04.
  9. 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.
  10. Jaume Ventura & Francesco Caselli, 2000. "A Representative Consumer Theory of Distribution," American Economic Review, American Economic Association, vol. 90(4), pages 909-926, September.
  11. James J. Heckman, 2001. "Micro Data, Heterogeneity, and the Evaluation of Public Policy: Nobel Lecture," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 673-748, August.
  12. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-95, December.
  13. Ale Smidts, 1997. "The Relationship Between Risk Attitude and Strength of Preference: A Test of Intrinsic Risk Attitude," Management Science, INFORMS, vol. 43(3), pages 357-370, March.
  14. Joost M.E. Pennings & Ale Smidts, 2000. "Assessing the Construct Validity of Risk Attitude," Management Science, INFORMS, vol. 46(10), pages 1337-1348, October.
  15. Kaye Basford & Geoffrey McLachlan, 1985. "The mixture method of clustering applied to three-way data," Journal of Classification, Springer, vol. 2(1), pages 109-125, December.
  16. Wayne DeSarbo & William Cron, 1988. "A maximum likelihood methodology for clusterwise linear regression," Journal of Classification, Springer, vol. 5(2), pages 249-282, September.
  17. Joost M.E. Pennings & Philip Garcia, 2001. "Measuring Producers' Risk Preferences: A Global Risk-Attitude Construct," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 993-1009.
  18. Michel Wedel & Wayne DeSarbo, 1995. "A mixture likelihood approach for generalized linear models," Journal of Classification, Springer, vol. 12(1), pages 21-55, March.
  19. Peter Tufano, 1998. "The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 53(3), pages 1015-1052, 06.
  20. John R. Graham & Daniel A. Rogers, 2002. "Do Firms Hedge in Response to Tax Incentives?," Journal of Finance, American Finance Association, vol. 57(2), pages 815-839, 04.
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