Hedging mean-reverting commodities.

Broll, Udo, Clark, Ephraim A. and Lukas, Elmar (2010) Hedging mean-reverting commodities. IMA Journal of Management Mathematics, 21 (1) . pp. 19-26. ISSN 1471-678X [Article] (doi:10.1093/imaman/dpp013)

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: A. > Business School > Accounting and Finance
ISI Impact: 0
Item ID: 4286
Useful Links:
Depositing User: Devika Mohan
Date Deposited: 02 Mar 2010 06:46
Last Modified: 13 Oct 2016 14:17
URI: https://eprints.mdx.ac.uk/id/eprint/4286

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