Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/205147
Authors: 
Broll, Udo
Welzel, Peter
Wong, Kit Pong
Year of Publication: 
2019
Series/Report no.: 
CEPIE Working Paper No. 05/19
Abstract: 
This paper examines the production and hedging decisions of the competitive firm under price uncertainty when the firm is not only risk averse but also regret averse. Regret-averse preferences are characterized by a modified utility function that includes disutility from having chosen ex-post suboptimal alternatives. The extent of regret depends on the difference between the actual profit and the maximum profit attained by making the optimal production and hedging decisions had the firm observed the true realization of the random output price. While the separation theorem holds under regret aversion, the prevalence of hedging opportunities may have perverse effect on the firm's optimal output level, particularly when the firm is sufficiently regret averse. The full-hedging theorem, however, does not hold. We derive sufficient conditions under which the regret-averse firm's optimal futures position is an under-hedge (over-hedge). We further show that the firm optimally increases (decreases) its futures position when the price risk possesses more positive (negative) skewness.
Subjects: 
Futures
Production
Regret theory
JEL: 
D21
D24
D81
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
442.08 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.