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Futures Hedging under Prospect Utility and Knightian Uncertainty

  • Donald Lien
Part of the Studies in Fuzziness and Soft Computing book series (STUDFUZZ, volume 88)

Abstract

This paper introduces Knightian uncertainty and loss aversion into the hedging decision framework. Knightian uncertainty allows for imprecision in the joint density function of spot and futures prices. Loss aversion dictates that an individual is more sensitive to losses (compared to a reference point) than to gains. The optimal futures position is characterized. It is found that inertia prevails. That is, there is a wide range of parameter configurations under which the conventional one-to-one hedge strategy is optimal. Moreover, loss aversion acts to reduce any deviation from this conventional strategy.

Keywords

Future Market Loss Aversion Future Price Future Contract Belief Function 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2002

Authors and Affiliations

  • Donald Lien
    • 1
  1. 1.Department of EconomicsUniversity of KansasLawrenceUSA

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