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RISK AVERSION, UNCERTAINTY AVERSION, AND VARIATION AVERSION IN APPLIED COMMODITY PRICE ANALYSIS

Authors: Frechette, Darren L.; Wen, Fang-I; Frechette, Darren L.; Wen, Fang-I;

RISK AVERSION, UNCERTAINTY AVERSION, AND VARIATION AVERSION IN APPLIED COMMODITY PRICE ANALYSIS

Abstract

Standard models of hedging behavior assume that either hedgers wish to minimize net price variation or they wish to balance variation versus profits. These models treat variation as risk and fail to distinguish between variation that is random and variation that is not random over time. Newer models of decision making differentiate between random and nonrandom variation somewhat, but they inadequately distinguish variation from risk. This paper reviews the distinctions among variation, uncertainty, and risk and calculates optimal hedge ratios for two models addressing the distinction. Empirical optimal hedge ratios typically decline toward zero when variation aversion is included in the models. These results may help explain why hedgers commonly hedge less than recommended by the standard models.

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Keywords

Marketing, FOS: Economics and business, Demand and Price Analysis

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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
0
Average
Average
Average
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