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Effects of skewness and kurtosis on production and hedging decisions: a skewed t distribution approach

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  • Donald Lien
  • Yaqin Wang

Abstract

This paper assumes that the spot price follows a skewed Student t distribution to analyze the effects of skewness and kurtosis on production and hedging decisions for a competitive firm. Under a negative exponential utility function, the firm will not over-hedge (under-hedge) when the spot price is positively (negatively) skewed. The extent of under-hedge (over-hedge) decreases as the forward price increases. Compared with the mean-variance hedger, the producer will hedge more (less) when negative (positive) skewness prevails. In addition, an increase in the skewness reduces the demand for hedging. The effect of the kurtosis, however, depends on the sign of the skewness. When the spot price is positively (negatively) skewed, an increase in kurtosis leads to a smaller (larger) futures position.

Suggested Citation

  • Donald Lien & Yaqin Wang, 2015. "Effects of skewness and kurtosis on production and hedging decisions: a skewed t distribution approach," The European Journal of Finance, Taylor & Francis Journals, vol. 21(13-14), pages 1132-1143, November.
    • Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1132-1143
    DOI: 10.1080/1351847X.2011.644858
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    Cited by:

    1. Fernandez-Perez, Adrian & Frijns, Bart & Fuertes, Ana-Maria & Miffre, Joelle, 2018. "The skewness of commodity futures returns," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 143-158.
    2. Adnen Ben Nasr & Matteo Bonato & Riza Demirer & Rangan Gupta, 2019. "Investor Sentiment and Crash Risk in Safe Havens," Journal of Economics and Behavioral Studies, AMH International, vol. 10(6), pages 97-108.
    3. Barbi, Massimiliano & Romagnoli, Silvia, 2018. "Skewness, basis risk, and optimal futures demand," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 14-29.
    4. Jun Yuan & Qi Xu & Ying Wang, 2023. "Probability weighting in commodity futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(4), pages 516-548, April.

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