Skewness Aversion, Output Uncertainty and Hedging in a Futures Market
Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management; National Bureau of Economic Research (NBER)
CentER, Tilburg University
Gregory Yom Din
Open University of Israel - Department of Management and Economics; Faculty of Exact Sciences, Tel Aviv University
February 25, 2005
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.
Number of Pages in PDF File: 20
Keywords: Skewness Aversion, Output Uncertainty, Futures Pricing, Speculators
JEL Classification: D81, G13
Date posted: February 25, 2005
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