Hedging mean-reverting commodities.

Broll, Udo and Clark, Ephraim A. and Lukas, Elmar (2010) Hedging mean-reverting commodities. IMA Journal of Management Mathematics, 21 (1). pp. 19-26. ISSN 1471-678X

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Abstract

This paper uses the expected utility framework to examine the optimal hedging decision for commodities with mean-reverting price processes. The derived results show that when commodity prices follow a mean-reverting process, the optimal hedge ratio differs significantly from the classical results found under standard geometric Brownian motion. Hence, a failure to accommodate mean reversion when it exists can lead to systematic biases in hedging decisions.

Item Type:Article
Research Areas:Business School > Accounting and Finance
Citations on ISI Web of Science:0
ID Code:4286
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Deposited On:02 Mar 2010 06:46
Last Modified:02 Jul 2014 11:27

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