Skewness Aversion, Output Uncertainty and Hedging in a Futures Market

20 Pages Posted: 25 Feb 2005

See all articles by Uri Ben-Zion

Uri Ben-Zion

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management; National Bureau of Economic Research (NBER)

Leon Zolotoy

CentER, Tilburg University

Gregory Yom Din

Tel-Hai Academic College; Open University of Israel - Department of Management and Economics

Date Written: February 25, 2005

Abstract

This paper presents a simple theoretical equilibrium model for the competitive commodity futures market where the agents face both price and output uncertainty. Three groups of agents, producers, entrepreneurs and speculators are introduced. A three-moment expected utility function is applied which accounts for both volatility and negative skewness aversion (prudence). We show that negative skewness aversion reduces the hedging incentive of the producer (farmer) and in some cases causes the latter to enter speculative positions in a futures market. In addition, we show that in presence of agents with three-moment expected utility function an equilibrium futures price is positively biased estimator of the expected market price in comparisson to the classical case of agents with mean-variance preferences.

Keywords: Skewness Aversion, Output Uncertainty, Futures Pricing, Speculators

JEL Classification: D81, G13

Suggested Citation

Ben-Zion, Uri and Zolotoy, Leon and Yom Din, Gregory, Skewness Aversion, Output Uncertainty and Hedging in a Futures Market (February 25, 2005). Available at SSRN: https://ssrn.com/abstract=673344 or http://dx.doi.org/10.2139/ssrn.673344

Uri Ben-Zion

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel
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National Bureau of Economic Research (NBER)

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Leon Zolotoy (Contact Author)

CentER, Tilburg University ( email )

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Gregory Yom Din

Tel-Hai Academic College ( email )

Upper Galilee
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Israel

Open University of Israel - Department of Management and Economics ( email )

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Israel