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Production and hedging decisions under regret aversion

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Listed:
  • Guo, Xu
  • Wong, Wing-Keung
  • Xu, Qunfang
  • Zhu, Xuehu

Abstract

In this paper, we investigate regret-averse firms' production and hedging behaviors. We first show that the separation theorem is still alive under regret aversion by proving that regret aversion is independent of the level of optimal production. On the other hand, we find that the full-hedging theorem does not always hold under regret aversion as the regret-averse firms take hedged positions different from those of risk-averse firms in some situations. With more regret aversion, regret-averse firms will hold smaller optimal hedging positions in an unbiased futures market. Furthermore, contrary to the conventional expectations, we show that banning firms from forward trading affects their production level in both directions.

Suggested Citation

  • Guo, Xu & Wong, Wing-Keung & Xu, Qunfang & Zhu, Xuehu, 2015. "Production and hedging decisions under regret aversion," Economic Modelling, Elsevier, vol. 51(C), pages 153-158.
  • Handle: RePEc:eee:ecmode:v:51:y:2015:i:c:p:153-158
    DOI: 10.1016/j.econmod.2015.08.007
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Broll, Udo & Welzel, Peter & Wong, Kit Pong, 2017. "The firm under regret aversion," CEPIE Working Papers 03/17, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    2. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2015. "Behavioural, Financial, and Health & Medical Economics: A Connection," Documentos de Trabajo del ICAE 2015-14, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    3. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Decision Sciences, Economics, Finance, Business, Computing, and Big Data: Connections," Tinbergen Institute Discussion Papers 18-024/III, Tinbergen Institute.
    4. repec:gam:jjrfmx:v:11:y:2018:i:1:p:15-:d:137130 is not listed on IDEAS
    5. repec:eee:reveco:v:51:y:2017:i:c:p:527-534 is not listed on IDEAS
    6. Chia-Lin Chang & Michael McAleer & Wing-Keung Wong, 2018. "Big Data, Computational Science, Economics, Finance, Marketing, Management, and Psychology: Connections," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 11(1), pages 1-29, March.

    More about this item

    Keywords

    Production; Hedging; Regret aversion; Risk aversion; Competitive firms;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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