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Selective Hedging, Information Asymmetry, and Futures Prices

Author

Listed:
  • April Knill

    (Florida State University)

  • Kristina Minnick

    (Bentley College)

  • Ali Nejadmalayeri

    (University of Nevada, Reno)

Abstract

Evidence from hedging practices suggests that firms will hedge only if they expect that unfavorable events will arise. In markets with a significant degree of information asymmetry in which hedgers are oligopolists with superior knowledge concerning supply and demand, such as oil and gas futures, we contend that these companies will selectively hedge price movements, causing sharp price adjustments upon resolution of information asymmetry. Using aggregate analysts' surprise as a proxy for the degree of information asymmetry, we show that positive aggregate surprises lead to a price decline for futures, which indicates that these firms unload their futures when the outlook is favorable.

Suggested Citation

  • April Knill & Kristina Minnick & Ali Nejadmalayeri, 2006. "Selective Hedging, Information Asymmetry, and Futures Prices," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1475-1502, May.
    • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:3:p:1475-1502
    DOI: 10.1086/500682
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    References listed on IDEAS

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    Cited by:

    1. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    2. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2011. "Crude oil hedging strategies using dynamic multivariate GARCH," Energy Economics, Elsevier, vol. 33(5), pages 912-923, September.
    3. Tanattrin Bunnag, 2015. "Hedging Petroleum Futures with Multivariate GARCH Models," International Journal of Energy Economics and Policy, Econjournals, vol. 5(1), pages 105-120.
    4. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, December.
    5. Mohamed Osman, 2015. "Dynamic Asymmetries in the Electric Consumption of the GCC Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 5(2), pages 461-467.

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