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Optimal Dynamic Hedging in Unbiased Futures Markets

Author

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  • Robert J. Myers
  • Steven D. Hanson

Abstract

A discrete-time dynamic hedging problem is solved under expected utility maximization and basis risk without imposing a particular parametric form for utility, nor assuming normally distributed cash and futures prices. The solution is valid for any increasing and strictly concave utility function, and for quite general specifications of the joint distribution of cash and futures prices. This generality is achieved by restricting the futures market to be unbiased, and requiring that the size of the cash position be nonstochastic. The dynamic hedging rule can be estimated empirically using similar methods to those used to estimate static hedge ratios. Copyright 1996, Oxford University Press.

Suggested Citation

  • Robert J. Myers & Steven D. Hanson, 1996. "Optimal Dynamic Hedging in Unbiased Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 13-20.
    • Handle: RePEc:oup:ajagec:v:78:y:1996:i:1:p:13-20
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    File URL: http://hdl.handle.net/10.2307/1243774
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    Citations

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    Cited by:

    1. Gianluca Stefani & Marco Tiberti, 2013. "Textbook Estimators of Multiperiod Optimal Hedging Ratios: Methodological Aspects and Application to the European Wheat Market," Working Papers - Economics wp2013_29.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    2. Kapil Gupta & Balwinder Singh, 2009. "Information Memory and Pricing Efficiency of Futures Contracts," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(2), pages 191-250, May.
    3. Simmons, Phil, 1999. "Does Separation Theorem Explain Why Farmers Have So Little Interest In Futures Markets?," Working Papers 12933, University of New England, School of Economics.
    4. Lai, Jing-Yi & Myers, Robert J. & Hanson, Steven D., 2003. "Optimal On-Farm Grain Storage by Risk-Averse Farmers," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(3), pages 1-22, December.
    5. Vadhindran K. Rao, 2011. "Multiperiod Hedging using Futures: Mean Reversion and the Optimal Hedging Path," JRFM, MDPI, vol. 4(1), pages 1-29, December.
    6. Kapil Gupta & Balwinder Singh, 2007. "Investigating the Pricing Efficiency of Indian Equity Futures Market," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 32(4), pages 486-512, November.
    7. A. J. Aulton & C. T. Ennew & A. J. Rayner, 1997. "Efficiency Tests Of Futures Markets For Uk Agricultural Commodities," Journal of Agricultural Economics, Wiley Blackwell, vol. 48(1‐3), pages 408-424, January.
    8. Johnson, D. Demcey & Nilsson, Tomas K.H. & Andersson, Hans, 2001. "Price Pooling and the Gains from Hedging: Application to a Swedish Grain Cooperative," 2001 Annual meeting, August 5-8, Chicago, IL 20554, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Penikas, Henry, 2011. "Copula-Based Price Risk Hedging Models," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 22(2), pages 3-21.
    10. Penikas, H., 2010. "Financial Applications of Copula-Models," Journal of the New Economic Association, New Economic Association, issue 7, pages 24-44.
    11. Gurmeet Singh, 2017. "Estimating Optimal Hedge Ratio and Hedging Effectiveness in the NSE Index Futures," Jindal Journal of Business Research, , vol. 6(2), pages 108-131, December.

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