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Hedging with regret

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  • Korn, Olaf
  • Rieger, Marc Oliver

Abstract

This paper investigates corporate hedging under regret aversion. Regret-averse firms try to avoid deviations of their hedging policy from the ex post best policy. The study presents a model of a firm that faces uncertain prices and seeks to hedge both profit risk and regret risk with derivatives. It characterizes optimal hedge positions and shows that regret aversion leads to stronger incentives to hedge downside price risk than standard expected utility theory. Regret aversion has a strong effect on the choice of the hedging instrument and provides a preference-based explanation for the use of options in corporate risk management.

Suggested Citation

  • Korn, Olaf & Rieger, Marc Oliver, 2019. "Hedging with regret," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 192-205.
  • Handle: RePEc:eee:beexfi:v:22:y:2019:i:c:p:192-205
    DOI: 10.1016/j.jbef.2019.03.002
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    Cited by:

    1. Baule, Rainer & Korn, Olaf & Kuntz, Laura-Chloé, 2019. "Markowitz with regret," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 1-24.

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    More about this item

    Keywords

    Regret aversion; Risk management; Hedging; Derivatives;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G40 - Financial Economics - - Behavioral Finance - - - General

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