Production and hedging decisions under regret aversion

Xu Guo, Wing Keung Wong, Qunfang Xu*, Xuehu Zhu

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    23 Citations (Scopus)

    Abstract

    In this paper, we investigate regret-averse firms' production and hedging behaviors. We first show that the separation theorem is still alive under regret aversion by proving that regret aversion is independent of the level of optimal production. On the other hand, we find that the full-hedging theorem does not always hold under regret aversion as the regret-averse firms take hedged positions different from those of risk-averse firms in some situations. With more regret aversion, regret-averse firms will hold smaller optimal hedging positions in an unbiased futures market. Furthermore, contrary to the conventional expectations, we show that banning firms from forward trading affects their production level in both directions.

    Original languageEnglish
    Pages (from-to)153-158
    Number of pages6
    JournalEconomic Modelling
    Volume51
    DOIs
    Publication statusPublished - Dec 2015

    Scopus Subject Areas

    • Economics and Econometrics

    User-Defined Keywords

    • Competitive firms
    • Hedging
    • Production
    • Regret aversion
    • Risk aversion

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