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Futures Hedging Under Disappointment Aversion

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  • Donald Lien

Abstract

This article considers optimal futures hedging decisions when the hedger is disappointment‐averse (Gul, 1991). When the futures contract is a perfect hedge instrument, a disappointment‐averse hedger always holds a position closer to the full hedge than a nondisappointment‐averse hedger. In the presence of basis risk, the optimal futures position is either a partial hedge or a full hedge. Neither Texas hedge nor overhedge could be optimal. The effects of different degrees of disappointment aversion on futures trading are also analyzed. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1029–1042, 2001

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  • Donald Lien, 2001. "Futures Hedging Under Disappointment Aversion," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(11), pages 1029-1042, November.
    • Handle: RePEc:wly:jfutmk:v:21:y:2001:i:11:p:1029-1042
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