Production and Anticipatory Hedging Under Time-Inconsistent Preferences

Journal of Futures Markets, Forthcoming

Posted: 10 Feb 2014 Last revised: 5 Jan 2015

See all articles by Donald D. Lien

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

Chia-Feng (Jeffrey) Yu

University of Adelaide - Business School; Financial Research Network (FIRN)

Date Written: August 24, 2014

Abstract

This paper analyzes the production and hedging decisions of a competitive firm under price uncertainty and time-inconsistent preferences. We show that the firm would over-hedge and the output choice would be affected by the firm's preferences and the price distribution, thereby identifying a novel circumstance under which the full-hedge theorem and the separation theorem may fail. Furthermore, when the firm can hedge at the same time as production or ahead of production, ex ante firm value is higher in the former case, suggesting that planning ahead for price risk may backfire in the presence of time-inconsistent preferences.

Keywords: Hyperbolic Discounting, Anticipatory Hedging Timing, Futures, Options

JEL Classification: D92, G02, G32

Suggested Citation

Lien, Donald and Yu, Chia-Feng (Jeffrey), Production and Anticipatory Hedging Under Time-Inconsistent Preferences (August 24, 2014). Journal of Futures Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2392939 or http://dx.doi.org/10.2139/ssrn.2392939

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

Chia-Feng (Jeffrey) Yu (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, SA 5005
Australia
+61-08-83132073 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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