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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