Abstract

http://ssrn.com/abstract=673344
 
 

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Skewness Aversion, Output Uncertainty and Hedging in a Futures Market


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


Open University of Israel - Department of Management and Economics

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.

Number of Pages in PDF File: 20

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

JEL Classification: D81, G13

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Date posted: February 25, 2005  

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: http://ssrn.com/abstract=673344 or http://dx.doi.org/10.2139/ssrn.673344

Contact Information

Uri Ben-Zion
Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management ( email )
Haifa 32000
Israel
(972-4) 829-4432 (Phone)
(972-4) 829-5688 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Leon Zolotoy (Contact Author)
CentER, Tilburg University ( email )
Postbus 90153
Tilburg, DC 5000 LE
Netherlands
Gregory Yom Din
Open University of Israel - Department of Management and Economics ( email )
1 University Road
Raanana, 43107
Israel
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