Seasonal Patterns of Futures Hedging and the Resolution of Output Uncertainty

Journal of Economic Theory, Vol. 3, No. 2, pp. 304-327, April 1991

Posted: 1 Dec 2008

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Abstract

Optimal futures hedging is examined in a two-good model with stochastic output and sequential information arrival. A producer's optimal hedge depends on demand elasticity, sensitivity of his output to weather, his correlation with aggregate output, and how rapidly his output uncertainty is resolved relative to other producers during different seasonal periods. Because regional output uncertainties are resolved at different times, the optimal futures position of a grower will commonly reverse in direction during the crop year. A producer with non-stochastic output who faces price risk arising from demand shocks may remain unhedged or even maintain a long position.

Suggested Citation

Hirshleifer, David A., Seasonal Patterns of Futures Hedging and the Resolution of Output Uncertainty. Journal of Economic Theory, Vol. 3, No. 2, pp. 304-327, April 1991. Available at SSRN: https://ssrn.com/abstract=1286304

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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