Prospect theory and two moment model: the firm under price uncertainty
Within the prospect theory the paper examines production and hedging decisions of a competitive firm under price uncertainty. We consider the prospect theory for the firm's utility function in the two moment model known as (mu,sigma)-preference. In contrast to the literature our findings show that the production under uncertainty can be larger than in the certainty case. Furthermore, we demonstrate that although the futures markets are unbiased the firm is overhedging.
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"Stochastic Dominance Analysis of iShares,"
Finance Working Papers
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"Stochastic Dominance and Mean-Variance Measures of Profit and Loss for Business Planning and Investment,"
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- Wing-Keung Wong, 2007. "Stochastic Dominance and Mean-Variance Measures of Profit and Loss for Business Planning and Investment," SCAPE Policy Research Working Paper Series 0705, National University of Singapore, Department of Economics, SCAPE.
- al-Nowaihi, Ali & Bradley, Ian & Dhami, Sanjit, 2008. "A note on the utility function under prospect theory," Economics Letters, Elsevier, vol. 99(2), pages 337-339, May.
- Wong, Wing-Keung & Li, Chi-Kwong, 1999. "A note on convex stochastic dominance," Economics Letters, Elsevier, vol. 62(3), pages 293-300, March.
- Harald Battermann & Udo Broll & Jack Wahl, 2008. "Utility functions of equivalent form and the effect of parameter changes on optimum decision making," Economic Theory, Springer, vol. 34(3), pages 401-414, March.
- Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
- Ormiston, Michael B & Schlee, Edward E, 2001. "Mean-Variance Preferences and Investor Behaviour," Economic Journal, Royal Economic Society, vol. 111(474), pages 849-61, October.
- Thomas Eichner & Andreas Wagener, 2004. "Relative risk aversion, relative prudence and comparative statics under uncertainty: The case of (μ, σ)-preferences," Bulletin of Economic Research, Wiley Blackwell, vol. 56(2), pages 159-170, 04.
- repec:tpr:qjecon:v:94:y:1980:i:2:p:317-28 is not listed on IDEAS
- Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-95, December.
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