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Relaxing Standard Hedging Assumptions in the Presence of Downside Risk

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Author Info
Mattos, Fabio
Garcia, Philip
Nelson, Carl

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Abstract

The purpose of this study is to analyze how the introduction of a downside risk measure and less restrictive assumptions can change the optimal hedge ratio in the standard hedging problem. Based on a dataset of futures and cash prices for soybeans in the U.S., the empirical findings indicate that optimal hedge ratios change dramatically when a one-sided risk measure is adopted and standard assumptions are relaxed. Further, the results suggest that in a downside risk framework with realistic hedging assumptions there is little or no incentive for farmers to hedge.

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Publisher Info
Paper provided by NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2005 Conference, April 18-19, 2005, St. Louis, Missouri with number 19040.

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Date of creation: 2005
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Handle: RePEc:ags:ncrfiv:19040

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Web page: http://www.agebb.missouri.edu/ncrext/ncr134/

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Keywords: Marketing;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September. [Downloadable!] (restricted)
  2. Demirer, Riza & Lien, Donald, 2003. "Downside risk for short and long hedgers," International Review of Economics & Finance, Elsevier, vol. 12(1), pages 25-44. [Downloadable!] (restricted)
  3. Eftekhari, Babak, 1998. "Lower Partial Moment Hedge Ratios," Applied Financial Economics, Taylor and Francis Journals, vol. 8(6), pages 645-52, December. [Downloadable!] (restricted)
  4. Lence, Sergio H., 1996. "Relaxing The Assumptions Of Minimum-Variance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(01), July. [Downloadable!]
  5. Lien, Donald & Tse, Yiu Kuen, 2000. "Hedging Downside Risk with Futures Contracts," Applied Financial Economics, Taylor and Francis Journals, vol. 10(2), pages 163-70, April. [Downloadable!] (restricted)
  6. Carl H. Nelson, 2004. "Toward exploring the location-scale condition: a constant relative risk aversion location-scale objective function," European Review of Agricultural Economics, Oxford University Press for the Foundation for the European Review of Agricultural Economics, vol. 31(3), pages 273-287, September.
  7. Turvey, Calum G. & Nayak, Govindaray, 2003. "The Semivariance-Minimizing Hedge Ratio," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(01), April. [Downloadable!]
  8. Lien, Donald & Tse, Y K, 2002. " Some Recent Developments in Futures Hedging," Journal of Economic Surveys, Blackwell Publishing, vol. 16(3), pages 357-96, July. [Downloadable!] (restricted)
  9. Grootveld, Henk & Hallerbach, Winfried, 1999. "Variance vs downside risk: Is there really that much difference?," European Journal of Operational Research, Elsevier, vol. 114(2), pages 304-319, April. [Downloadable!] (restricted)
  10. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June. [Downloadable!] (restricted)
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  1. Power, Gabriel J. & Vedenov, Dmitry V., 2008. "The Shape of the Optimal Hedge Ratio: Modeling Joint Spot-Futures Prices using an Empirical Copula-GARCH Model," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37609, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. [Downloadable!]
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