testing the unbiasedness hypothesis in the forward foreign exchange market a specification analysis abstract this paper evaluates two popular regression methods of testing the unbiasedness hypothesis in the forward foreign exchange market for the 30 day canada united states forward foreign exchange market the evidence overwhelmingly indicates that it is inappropriate to treat the structure of the systematic and stochastic components of the test relations as constant over time hence conclusions inferred from parameter significance testing based upon full sample estimation can be very misleading accordingly we argue for a specification analysis of the test relations and more explicit modelling of market fundamentals

futures market equilibrium with heterogeneity and a spot market at harvest abstract this paper studies equilibrium in the futures market for a commodity in a single good economy which is populated by heterogeneous producers and speculators the commodity is traded only in the spot market at harvest whereas futures contracts written on the commodity are traded continuously the model illustrates the role of heterogeneity and non tradeness in a futures market equilibrium the results show that the futures price is driven by aggregate wealth rather than the spot price as in other models and that the futures price process is a simple one which depends on the relative risk process

the minimum variance hedge ratio under stochastic interest rates in an environment where interest rates are stochastic we examine the case of a pure hedger endowed with a fixed position in a long term bond in contrast to conventional wisdom according to which the difference between hedging through forward contracts and futures is immaterial it turns out that the minimum variance hedge ratio using forwards comprises two terms instead of one only when using futures the magnitude of the difference between the two hedge ratios may be important under some plausible assumptions this result is due to the presence of additional interest rate risk that bears on the profit and loss statement associated with the forward position this sheds some additional light on the respective features of forward and futures contracts written on interest rate sensitive securities

optimal currency risk hedging abstract this paper investigates the optimal hedging strategy of a domestic expected utility maximizer endowed with a temporarily non traded position in a foreign investment the domestic and foreign yield curves the exchange rate between the two involved currencies and the foreign investment value are stochastic and obey fairly general diffusion processes we compare the hedger s optimal strategies using either exchange rate forward contracts or futures contracts for both strategies the optimal number of contracts held can be broken down into several components having clear economic interpretations however while futures contracts are known in such a context to be more difficult to price than their forward counterparts the optimal strategy using them is simpler this is due to the fact that when forward contracts are used incurred profits or losses that accrue to the investor s wealth at each instant are locked in in the forward position up to the contract maturity thus discounting these gains or losses back at the current date brings about an interest rate risk therefore the investor s hedging strategy itself generates an additional risk which in turn induces the need for additional hedging the magnitude of the difference between the two hedge ratios may be significant under a set of plausible assumptions since in general financial markets are not complete the additional interest rate risk cannot be perfectly hedged hence the marking to market mechanism that characterizes futures contracts and allows for the complete elimination of this risk is valuable for risk averse agents

commodity price forecasting with large scale econometric models and the futures market this paper compares the accuracy of major commercial price forecasts for corn wheat soybeans soybean oil soybean meal cotton live cattle and hogs the price forecasting information in futures prices is evaluated by comparison the results among commercial forecasters are mixed but futures prices perform relatively better on average although not universally so these results have important implications for operational risk management

on the accuracy of the mean variance approximation for futures markets abstract simple approximate fomulae for the volume and gains from futures trading are derived using the mean variance model the errors involved are exactly quantified and shown to be negligible for the futures price and welfare gains though potentially larger for volumes

spot and futures prices of nonstorable commodities under rational expectations the paper examines the effect of the presence of a commodity futures market upon the price formation process in a stochastic rational expectations framework an optimizing model with price uncertainty and risk aversion is used in order to solve equilibrium distributions of prices for nonstorable commodities the existence of futures trading does not affect the degree of short term spot price fluctuations however if the commodity market disturbance that originates from stochastic consumption demand is serially dependent then the long term price variation is smaller with a futures market than without it futures prices fluctuate less variably over time than spot and expected prices finally there exists a futures intervention rule whereby the authority can stabilize spot prices and raise the overall welfare of society

on the optimal hedge of a nontraded cash position in this paper we focus on the optimal demand for futures contracts by an investor with a logarithmic utility function who attempts to hedge a nontraded cash position when the analysis is conducted in the cash commodity price space we show that the value function associated with the bernoulli investor program is not additively separable thus suggesting that this investor hedges against shifts in the opportunity set as represented by the commodity price by establishing the equivalence between the cash formulation of the problem and the wealth formulation we are able to analyze the problem in the wealth commodity price space in this space we show the additive separability of the value function when the futures settlement price process is perfectly locally correlated with the commodity price process the demand for futures in this instance is composed of a a mean variance term and b a minimum variance component that is a classic feature of models with nontraded assets since the first best nonmyopic optimum is attained however the deviation from a mean variance demand should not be interpreted as the expression of a nonmyopic behavior but rather as an attempt to restore a first best optimum on the other hand when the correlation between the futures price and the underlying commodity price is imperfect in general the value function does not separate additively the first best solution cannot be attained and the optimal futures trading strategy involves a hedging term against shifts in the opportunity set in the classic dynamic portfolio problem the investor selects a trading strategy in risky and riskless assets so as to maximize his or her expected lifetime utility in this environment where all assets can be freely traded the logarithmic investor behaves myopically to the extent that he or she ignores shifts in the opportunity set when making current choices samuelson 271 mossin 24 hakansson 16 merton 22 in particular in models with continuous trading it turns out that the value function corresponding to the investor s program is additively separable in wealth and state variables the implication is that his or her behavior will be myopic i e that his or her demand functions for assets will be of the pure meanvariance efficiency type and in particular will not include any dynamic hedging components that are characteristic of financial markets with shifting opportunities in this paper we investigate the structure of the bernoulli investor s demand functions in the situation where one asset cannot be freely traded in the market

an equilibrium analysis of hedging with liquidity constraints speculation and government price subsidy in a commodity market we develop a simple commodity model to analyze i the effects of hedgying with liquidity constraints due to producers inability to bear unlimited trading losses ii the role of speculation in the process of risk allocation between consumers and producers and iii the equilibrium implications of government price subsidies to the producers we find that 1 liquidity constraints can cause futures prices to exhibit mean reversion which then makes speculation profitable 2 speculation tends to make futures price volatility an increasing function of futures price and 3 government price subsidy if actively hedged by the producers serves to lower the futures risk premium and reduce futures volatility commodity spot and futures prices are determined by the following types of market participants producers consumers speculators and governments producers have generally taken short futures positions in order to hedge against price declines consumers have generally taken long futures positions in order to hedge against price increases speculators who neither produce nor intend to consume the commodity are present in the spot and futures markets for the purpose of making a profit governments play significant roles in the markets by providing producers with various support programs and in some cases by directly intervening in the markets to affect commodity prices or adjust inventory levels the traditional approach to commodity futures pricing has been based on the theory of storage 1 as fama and french 1987 1988 show this approach to commodity pricing is particularly useful for explaining the basis movement as a function of inventory levels based on the hypothesis that the marginal convenience yield on inventory declines at a decreasing rate as

the time pattern of hedging and the volatility of futures prices the paper proposes a multi period model of hedging which allows for a futures position to be revised within the cash market holding period within this framework we assess the robustness of the two period theory of hedging when generalized to many periods we characterize the normal time path of a hedge and the way it is affected by the requirement that futures accounts mark to market daily finally we show how the resolution of production uncertainty over time affects hedging behavior and determines the volatility of futures prices in the large literature on hedging in futures markets the principal analytical accounts of hedging are framed in a two trade date setting an agent commits himself now to a future purchase or sale of a good whose cash price later is uncertain this risk is hedged by purchase or sale of an appropriate number of futures contracts and holding this futures position until the cash transaction is realized in the present paper we formulate a multi period model of hedging which allows for the futures position to be revised within the cash market holding period the resulting analysis captures an important institutional reality that is absent in a two trade date model namely the fact that the day to day fluctuations of the futures price will generate a series of random cash flows over the period during which a futures position is held this is due to the requirement that futures accounts mark to market daily within this framework we address a number of issues first we assess the robustness of the two period theory of hedging when generalized to many periods second we characterize the normal time path of a hedge and contrast futures and forward contracts from the perspective of an individual hedger finally we show how the resolution of production uncertainty over time affects hedging behaviour and determines the volatility of futures prices while the literature on asset demand in a multiperiod setting is large futures markets are specifically treated in a limited number of studies grauer and litzenberger 1976 are concerned principally with characterizing the relation of spot and futures prices in a market for a storable periodically produced commodity they offer a rationale for positive stock holding in markets where spot price exceeds the futures price richard and sundaresan 1980 are also concerned primarily with characterizing price behaviour since they posit identical consumers in equilibrium individual holdings of futures are zero there is no hedging activity in the sense that we understand it breeden 1980b analyzes the optimal futures position sizes in a multiperiod setting his framework is more general than ours in that his is a multi good multi asset model where preferences

methods for selecting the optimal dynamic hedge when production is stochastic a dynamic hedging problem with stochastic production is solved the optimal feedback rules recognize that future hedges will be chosen optimally based on the most current information the resulting distribution of revenue is analyzed numerically this analysis enables the hedger to select his appropriate level of risk aversion

a century of research on agricultural markets this article provides a perspective on major innovations in research on agricultural markets over the past century we review research on market structure and performance vertical coordination arrangements and institutions for producer collective action contributions to empirical modeling of agricultural price determination and marketing margins are also evaluated as are innovations in research on spatial market relationships and the role of storage finally we discuss contributions to understanding market information systems and the functioning of market based mechanisms for agri

optimal hedging and equilibrium in a dynamic futures market abstract this paper considers an agent maximizing the expected utility of the sum of the terminal value of a fixed portfolio of spot market assets and the terminal value of a margin account on a futures trading position closed form solutions for the optimal hedging strategy are provided in several special cases

journalists and the stock market we use exogenous scheduling of wall street journal columnists to identify a causal relation between financial reporting and stock market performance to measure the media s unconditional effect we add columnist fixed effects to a daily regression of excess dow jones industrial average returns relative to standard control variables these fixed effects increase the r super 2 by about 35 indicating each columnist s average persistent bullishness or bearishness to measure the media s conditional effect we interact columnist fixed effects with lagged returns this increases explanatory power by yet another one third and identifies amplification or attenuation of prevailing sentiment as a tool used by financial journalists the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

dynamic decisions under risk application of ito stochastic control in agriculture in agricultural economics most studies of dynamic decisions under risk have been empirical with less emphasis on theory in finance resource economics and general economics however ito stochastic control is popular for theoretical work optimal decisions can be characterized using the powerful ito stochastic calculus this paper describes the assumptions and methods of ito control constructs a dynamic model of agricultural decisions under risk and illustrates with four examples

optimal dynamic hedging in unbiased futures markets a discrete time dynamic hedging problem is solved under expected utility maximization and basis risk without imposing a particular parametric form for utility nor assuming normally distributed cash and futures prices the solution is valid for any increasing and strictly concave utility function and for quite general specifications of the joint distribution of cash and futures prices this generality is achieved by restricting the futures market to be unbiased and requiring that the size of the cash position be nonstochastic the dynamic hedging rule can be estimated empirically using similar methods to those used to estimate static hedge ratios

adverse selection and security design this paper studies the problem of optimal security design by a privately informed entrepreneur in the context of a simple parametric model it is shown that the entrepreneur does not find it profitable to float an asset that affords her an informational advantage the reason is that with rational uninformed outside investors the entrepreneur faces adverse selection in the security market which prevents her from exploiting her position as an insider this is true whether or not she has market power in trading the asset consider a risk averse entrepreneur who is contemplating what security to issue the entrepreneur anticipates that during subsequent trading in the secondary market she will have private information on the payoff of her investment as well as on other risks in the economy the design of the asset is therefore influenced not only by a desire to share risk but also by informational considerations involving the potential for insider trading profits this paper studies the problem of optimal security design in the context of a simple parametric model with gaussian risks and cara utility trading in the secondary market is modelled via the static reduced form concept of rational expectations equilibrium in which uninformed outside investors use market prices to try to infer the private information of the entrepreneur or insider as she will sometimes be called it is shown that the entrepreneur does not find it profitable to float an asset that affords her an informational advantage an optimal asset entails a fully revealing rational expectations equilibrium and is perfectly correlated with the issuer s endowment risk the reason is that with rational outside investors the entrepreneur faces adverse selection in the security market which prevents her from exploiting her position as an insider she is better off foregoing her informational advantage and concentrating on her hedging motive alone in the particular setting described in the paper equity2 is an optimal asset since the entrepreneur has no privileged information regarding its payoff and it allows efficient risk sharing the issue of security design when prices have an informational role to play is just beginning to be researched closely related to this paper is the work of demange and laroque 1995 who use a competitive rational expectations model with noise traders to analyse the problem posed above except for some special cases however they are able to get only numerical results in comparison the present paper obtains partially revealing equilibria in a model in which all agents are rational furthermore demange and laroque

rethinking macroeconomics what failed and how to repair it the standard macroeconomic models have failed by all the most important tests of scientific theory they did not predict that the financial crisis would happen and when it did they understated its effects monetary authorities allowed bubbles to grow and focused on keeping inflation low partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth after the crisis broke policymakers relying on the models floundered notwithstanding the diversity of macroeconomics the sum of these failures points to the need for a fundamental re examination of the models and a reassertion of the lessons of modern general equilibrium theory that were seemingly forgotten in the years leading up to the crisis this paper first describes the failures of the standard models in broad terms and then develops the economics of deep downturns and shows that such downturns are endogenous further the paper argues that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis contrary to what the standard models argued finally the paper contrasts the policy implications of our framework with those of the standard models

an analysis of the stabilizing and welfare effects of intervention in spot and futures markets this paper analyzes the effects of three alternative rules on the long run distributions of both the spot and futures prices ina single commodity market in which the key behavioral relationships are derived from the optimizing behavior of producers and speculators the rules considered include i leaning against the wind in the spot market ii utility maximizing speculative behavior by the stabilization authority in the futures market iii leaning against the wind in the futures market since the underlying model is sufficiently complex to preclude analytical solutions the analysis makes extensive use of simulation methods as a general proposition we find that intervention in the futures market is not as effective in stabilizing either the spot price of the futures price as is intervention in the spot market indeed rule iii while stabilizing the futures price may actually destabilize the spot price furthermore the analogous type of rule undertaken in the spot market will always stabilize the futures price to a greater degree than it does the spot price the welfare implications of these rules are also discussed our analysis shows how these can generate rather different distributions of welfare gains including the overall benefits this abstract was borrowed from another version of this item

press freedom externally generated transparency and stock price informativeness international evidence abstract this paper examines the impact of press freedom on stock price informativeness in a sample of firms from 50 countries we find a significant relation between more press freedom and lower stock price synchronicity our results suggest that the freedom of the press can enhance the information environment of stock markets

futures markets and commodity options hedging and optimality in incomplete markets abstract this paper examines the allocational roles of futures markets and commodity options in multi good and multi period economies in a continuous time model with time additive utilities and homogeneous beliefs trading in unconditional futures contracts the market portfolio and a riskless asset gives any pareto optimal allocation individuals optimal holdings of futures contracts in the continuous time model are related to their consumption bundles and to their risk tolerances it is shown that both hedging and reverse hedging behavior are possible in the general model with discrete trading options on portfolios of commodity options are shown to permit any unconstrained pareto optimal allocation

optimal currency hedge ratios and interest rate risk abstract the objective of this article is to provide a framework for the interpretation of the optimal currency hedge ratios on foreign investments taking into account interest rate risk this is made possible by using a continuous time setting in the spirit of merton 1969 we focus on the importance of the interest rate differential forward basis in setting the optimal currency hedge because of the influence of interest rates on exchange rates more specifically we consider two discount bonds a domestic and a foreign one which follow stochastic processes possibly correlated with the other state variables of the model it is shown that the optimal hedge ratio can be split into five components a a macro economic component which is a function of the volatility of the interest rate differential and its covariance with currency movements this term depends on the currency considered but not on the asset being hedged b an asset specific term which is directly related to the covariance of the foreign currency asset return with exchange and interest rate movements c a speculative term function of the investor s risk preference and of the conditional risk premium on the exchange rate and d two stochastic opportunity set hedging terms the analysis of the optimal hedge ratio is illustrated on the period december 1970 1989 for stock and bond investments in seven countries jel g15 f31

a privately revealing rational expectations equilibrium for the futures market abstract this paper develops a model of the futures market with two types of participants farmers and speculators farmers undertake production decisions and face both output and spot price risk as opposed to speculators who face only spot price risk agents have constant absolute risk aversion von neumann morgenstern utility functions and form rational expectations about the future output shock and spot price we assume that traders specialize in information collection in our model the futures price is not a sufficient statistic for the market information we show that the rational expectations equilibrium ree futures price is privately revealing to traders who purchase costly information this ree is efficient in the sense that in equilibrium traders are in possession of all market information we demonstrate that traders a have an incentive to collect costly information and b are better off by specializing in collecting the information in which they have a comparative advantage in terms of the quality of the information that they can obtain finally we show that the futures market stabilizes the spot price

herding in analysts recommendations the role of media abstract this study investigates the impact of media on analysts herding behavior when making stock recommendations we find three main results first we find that analysts herd less when stocks are covered more in the media second when the firm has negative media sentiment analysts tend to herd more third higher disagreement in the media is associated with a higher tendency to herd among analysts these findings are robust to the confounding effect of news flows on returns as well as to alternative explanations in addition we find that the effect of media on the herding behavior is conditional on analyst characteristics

seasonal patterns of futures hedging and the resolution of output uncertainty abstract optimal futures hedging is examined in a two good model with stochastic output and sequential information arrival a producer s optimal hedge depends on demand elasticity sensitivity of his output to weather his correlation with aggregate output and how rapidly his output uncertainty is resolved relative to other producers during different seasonal periods because regional output uncertainties are resolved at different times the optimal futures position of a grower will commonly reverse in direction during the crop year a producer with non stochastic output who faces price risk arising from demand shocks may remain unhedged or even maintain a long position

multiperiod production with forward and option markets production and hedging in both forward and options markets are analyzed for forward looking firms that maximize expected utility in the presence of unbiased forward and options prices it is shown that such firms will use options as hedging instruments this result contrasts with the conclusions from studies that assume myopic behavior and occurs because forward looking agents care about the effect of future output prices on profits from future production cycles simulations support the theoretical results and show how the introduction of an options market influences the optimal forward position

corporate social responsibility and media coverage abstract in this study we examine whether firms that act more socially responsible receive more favorable media coverage and we consider whether firms use csr to actively manage their media image we focus on all news stories about a firm not just those that report on specific csr initiatives and find that more socially responsible firms receive more favorable news reportage overall i e they have a more positive media image these findings are robust after controlling for potential endogeneity further consistent with firms actively managing their media image we find a stronger relation between csr and media favorability when incentives to improve a firm s media image are high e g among firms in sin industries during periods of low investor sentiment and prior to seasoned equity offerings finally we find that for firms that demonstrate superior social responsibility and receive more favorable news reporting there is a significant interaction between social responsibility and media favorability that increases decreases a firm s equity valuation cost of capital our results are consistent with the media slanting their reporting in favor of good performing csr firms overall we contribute to the literature by showing that firms can influence their media coverage through a relatively subtle channel csr performance

the macroeconomic tradeoffs of price and income policies under some conditions price and income policies may succeed in reaching the objective they pursue but in all cases tradeoffs place limits on what they can achieve these tradeoffs are discussed for three kinds of objectives reducing inequalities solving the inflation unemployment dilemma and restoring business profitability the uncertainties particularly the relationship between wages and employment are emphasized copyright 1990 by the editors of the scandinavian journal of economics

how important is the financial media in global markets this article studies differences in the information content of 870 000 news announcements in 56 markets around the world in most developed markets a firm s stock price moves much more on days with public news about the firm in contrast in many emerging markets volatility is similar on news and non news days we examine several hypotheses for our findings cross country differences in stock price reactions are best explained by insider trading followed by differences in the quality of the news dissemination mechanism our findings are useful for quantifying the extent of insider trading and how the financial media affects international markets jel g14 g15 public news announcements are a major mechanism for disseminating information to investors each day the financial media releases thousands of articles covering companies in markets worldwide investors use this news to estimate assets fundamental values despite the perceived importance of the

forward and futures markets and the competitive firm under price uncertainty recent remedies for managing the output price risk faced by a competitive firm sometimes include the prescription of hedging this practice usually entails combining spot market sales with trading opportunities in forward or futures markets the forward hedge represents a risk free price the futures hedge offers a risky alternative which arises because of basis the variable relationship between the spot and futures quotations rather than treating forward and futures as mutually exclusive or as perfect substitutes a competitive firm can carefully construct a portfolio which combines spot forward and futures positions holthausen 9 and feder just and sclmitz 5 hereafter fjs initiate an extensive discussion of a risk averse firm which uses futures contracts when faced with an uncertain output price but no basis risk both articles employ general utility and density functions to derive their results their conclusions include independence of the production decision from the probability density of the spot price and the firm s degree of risk aversion extensions of these two articles usually focus on the robustness of the separation conclusion to either the addition of basis or the addition of production uncertainty to the models the risk free characteristic that holthausen and fjs attribute to futures contracts really better describes a forward contract jarrow and oldfield 11 paul heifner and helmuth 17 and many others document the importance of recognizing the unique charapteristics of these two different types of contracts batlin 2 builds on the holthausen and fjs foundation by adding basis risk to his model fjs explicitly qualify their model as applicable to only those commodities with little or no production uncertainty subsequent articles augment their analysis with the condition of stochastic production chavas and pope 3 anderson and danthine 1 marcus and modest 15 ho 8 and grant 6 all include production uncertainty in different permutations of the fundamental model those which simultaneously include both basis and production risk achieve analytical solutions by assuming specific utility or density functions

optimal consumption policy under uncertain income this paper considers the consumption behavior of a risk averse consumer with a preference for immediate consumption who faces an uncertain income stream and plans for a finite or infinite number of periods the consumer may borrow up to a limit or save where both saving and borrowing are subject to the same positive rate of interest we derive the optimal consumption policies for both finite and infinite planning horizons investigate their characteristics and analyze their economic and behavioral implications

optimal dynamic hedging decisions for grain producers the application of an optimal dynamic hedging model was explored for a county in north carolina corn yield harvest corn basis and december corn futures prices were forecast the forecasts were used to calculate optimal dynamic hedge positions when the hedge position was updated infrequently commissions were only slightly higher than commissions from a fixed hedge gains from updating the hedge position over the corn growing season were not substantial compared to a fixed hedge position

optimal spreading when spreading is optimal abstract this paper assumes an investor who has a non traded position operating in a stochastic interest rates environment the investor trades continuously either distinct futures contracts or distinct forward contracts in order to maximize his expected utility of terminal wealth in order to reach the welfare level of the first best optimum the investor must incorporate into his portfolio either two distinct futures contracts or two distinct forward contracts the optimal forward contracts dynamic spreading strategy has two components a speculative component and a minimum variance hedging component the minimum variance hedging component is composed of a short position in the nearby contract and a long position in the deferred contract the speculative component serves to replicate the growth optimum portfolio the speculative component is composed of a short position in the contract which is the most negatively correlated with the growth optimum portfolio and a long position in the other contract the marking to market procedure of the futures positions forces the investor to hold less futures contracts than the corresponding forward contract positions the analysis is also extended to incomplete markets and to inter market spreading

on intraday risk premia this article presents a framework for analyzing the dynamic effects of anticipated large demand pressures on asset risk premia we show that large institutions who can time their entry into the market will trade either at the open or during periods of unusual demand pressures we show that if these institutions do enter later in the day they trade in the same direction as institutions which provide liquidity continuously institutions therefore appear to exhibit herding behavior we also explore how changing the uncertainty of demand pressures late in the day affects trading costs throughout the day most financial market investors do not continuously monitor intraday fluctuations in stock prices other activities e g outside employment often take precedence over following the stock market and there are limitations to processing information for example a reader of this page is likely to be unaware of current financial market prices in fact for many investors entry into financial markets occurs once a day or even less frequently given these institutional realities it is of interest to explore how asset markets react when it is known that a set of very large predictable demands will arrive during the afternoon does their arrival affect prices only when they arrive or throughout the day if the price impact is spread out then how do trading costs behave during the day if some traders have the flexibility to time their entry into the market when will they arrive during the day and how will their entry decisions affect asset risk premia if market participants anticipate that demands in the afternoon will be unusually volatile how does this affect the intertemporal behavior of prices and expected returns earlier in the day the primary focus of this article is the development of tractable methodologies that can address these issues

production hedging and speculative decisions with options and futures markets this paper analyzes production hedging and speculative decisions when both futures and options can be used in an expected utility model of price and basis uncertainty when futures and option prices are unbiased optimal hedging requires only futures options are redundant options are used together with futures as speculative tools when market prices are perceived as biased straddles are used to speculate on beliefs about price volatility and to hedge the futures position used to speculate on beliefs about the expected value of the futures price mean variance analysis in general is not consistent with expected utility when options are allowed one extension of sandmo s expected utility model of the competitive firm under price uncertainty considers the use of futures or forward contracts danthine holthausen and feder just and schmitz show that without basis uncertainty the optimal output level is not affected by price risk also with an unbiased futures price the optimal hedging level of the competitive firm is the full hedge while a biased futures price will result in a partly speculative hedge related works include batlin who allows for basis risk in the form of imperfect time hedging paroush and wolf and antonovitz and nelson who consider basis risk with the simultaneous availability of futures and forward contracts grant honda losq newbery and stiglitz and rolfo who allow for production uncertainty chavas and pope who allow for production uncertainty and hedging costs and karp who considers the problem in a dynamic setting this paper provides a further extension of this analysis by allowing options as a means of coping with price risk with the introduction of commodity options on futures for many commodities in the 1980s this problem appears relevant to a number of production settings especially in agriculture specifically this paper considers the simultaneous choice of a production level and of hedging levels of futures and options within the general expected utility model the model allows for basis uncertainty but the production process is assumed to be nonstochastic

speculative price economic welfare and the idiot of chance p aul cootner stimulated significant research on the subject of speculative markets in both commodities and equities his papers 1960 1964 1967 were original and provocative one paper began with the statement the subject matter of this paper is bound to be considered heresy i can say that without equivocation because whatever views anyone expresses on this subject are sure to conflict with someone else s deeply held beliefs 1964 p 231 most of the papers concerned with the operation of futures markets in commodities test the efficiency of the market by examining the stochastic nature of futures prices which samuelson refers to as the idiot of chance in particular it is asked whether the price of a futures contract is a martingale cootner s contention which runs counter to the tide of academic writings is that speculative prices are not random walks but are constrained by economically determined barriers 1964 ch 11 the present paper is in the spirit of cootner s thinking about the economic and welfare implications of speculative markets my main conclusions are as follows 1 the optimality of resource allocation defined as the sum of consumer and producer surplus depends upon the accuracy of the forward price at the time production decisions are made as a forecast of the subsequent spot price when consumption occurs the existence or nonexistence of the martingale property of futures prices between these two dates is irrelevant for welfare purposes 2 social loss is a multiple of the square of the forecast error between the forward price and the subsequent spot price expected social loss is irreducible when the forward price is equal to the mathematical expectation of the subsequent spot price 3 the longer the period between the production decisions and the subsequent consumption decisions the greater the bias between the forward price and subsequent spot price 4 it has been claimed that in an efficient market the spot price at time t should just depend upon the price at t 1 and not upon earlier prices it is proved that this situation is neither a necessary nor a sufficient condition for rational expectations 5 therefore there is a tenuous connection between the stochastic nature of speculative price and measures of economic welfare but there is a direct connection between the forecast errors and economic welfare

the market for news we investigate the market for news under two assumptions that readers hold beliefs which they like to see confirmed and that newspapers can slant stories toward these beliefs we show that on the topics where readers share common beliefs one should not expect accuracy even from competitive media competition results in lower prices but common slanting toward reader biases on topics where reader beliefs diverge such as politically divisive issues however newspapers segment the market and slant toward extreme positions yet in the aggregate a reader with access to all news sources could get an unbiased perspective generally speaking reader heterogeneity is more important for accuracy in media than competition per se

a model of returns and trading in futures markets this paper develops an equilibrium model of a competitive futures market in which investors trade to hedge positions and to speculate on their private information equilibrium return and trading patterns are examined 1 in markets where the information asymmetry among investors is small the return volatility of a futures contract decreases with time to maturity i e the samuelson effect holds 2 however in markets where the information asymmetry among investors is large the samuelson effect need not hold 3 additionally the model generates rich time tomaturity patterns in open interest and spot price volatility that are consistent with empirical findings an issue central to the analysis of futures markets is the relationship between speculation and futures price volatility a long line of models see e g grossman 1977 bray 1981 have tried to understand the effects of speculation on futures price volatility this line of research is economically relevant as speculative trades appear to be an important determinant of volatility in futures markets for instance roll 1984 finds that public information accounts for only a fraction of the movement in orange juice futures prices which suggests that investors bring their own private information into the market through their trades unfortunately existing models of speculation in futures are essentially static ones and cannot speak to a number of interesting aspects of returns and trading in futures markets an example is the relationship between the price volatility and the timeto maturity of a futures contract the analysis of this issue is an important one and has a long history assuming the existence of a representative investor and an exogenous spot price process samuelson 1965 shows that when there is a mean reverting component in the spot price process and no

market response to financial reports abstract a two date rational expectations model is analyzed at the first date traders can privately acquire a costly signal that provides imperfect information about a public report that will be issued at the second date equilibrium characterizations are provided for the fraction of traders that become informed and the informativeness of the first date price as well as the price change variance and the expected trading volume at the second date comparative statics identify how the above variables are influenced by changes in the information content of the public report and in particular how market phenomena at the public release date are influenced by endogenous prior information acquisition and trading in response to the forthcoming public release

dynamically optimal after tax grain storage cash grain sale and hedging strategies this article utilizes a stochastic dynamic programming sdp model that considers the state variables of a before tax income b grain storage c quantity of futures position d value of futures position e wheat price and f basis level decision variables are monthly cash grain sales and futures market transactions in comparing the post sample performance of sdp to other marketing strategies over a four year period sdp resulted in 5 961 to 25 021 more wealth than the other strategies considered also these other strategies yielded a standard deviation of after tax income that was 30 to 621 greater than that from the sdp framework

optimal hedging in a dynamic futures market with a nonnegativity constraint on wealth abstract this paper examines the issue of optimal hedging demands for futures contracts from an investor who cannot freely trade his portfolio of primitive assets in the context of lognormal rather than normal returns and of a constant absolute risk aversion utility function in this context the nonnegativity constraint on wealth is binding and the optimal hedging demands are not identical with those encountered in the bulk of the literature which has largely overlooked this problem negative results concerning the derivation of equilibrium in the futures markets and the computation of the open interests then follow

herding in delegated portfolio management when is comparative performance information desirable abstract we address the issue of investors asset allocation decisions when portfolio management is delegated to an agent contrary to predictions from traditional financial theory it is shown that investors may not induce their manager to allocate funds to the asset with the highest return instead they may herd in their asset allocation decision and induce trade in a particular asset because another manager is trading in it and despite the presence of a more profitable alternative doing so allows investors to write an efficiency improving relative performance contract on the other hand herding leads investors to design wage contracts strategically resulting in more aggressive and thus less profitable trade in equilibrium we show that herding occurs when the cost of information is high information precision is low and when managers are sufficiently risk averse moreover when investors can decide whether or not to disclose information about their manager s performance they will not do so

wage bargaining and the phillips curve a macroeconomic view 1983 wage bargaining and the phillips curve a macroeconomic view applied economics vol 15 no 1 pp 61 71

portfolio theory and the demand for futures the case of california cotton this paper examines the simultaneous choice of cropping patterns and futures positions it derives the demand for hedging as a function of the price of a hedge and the crop choice set it estimates these functions for california cotton farmers it finds that both the costs of hedging and the opportunity to diversify risk by growing other crops substantially change the optimal hedge for california cotton farmers

an introduction to the theory of rational expectations under asymmetric information every good economics textbook contains the cliche that market prices provide signals which facilitate the allocation of resources to their best use in a world not subject to random shocks consumers and producers when faced with competitive prices need look no further than their own preferences or production technology to be able to make a decision they need give no thought to the tastes endowments or technology of other agents however in a world subject to random shocks this is no longer the case agents are faced with the problem of forecasting future states of nature and more importantly of forecasting the impact of these states on the actions of other agents rational expectations theories provide a model of how agents make those forecasts in a world subject to random shocks it will be the case that agents acquire or at least attempt to acquire information about the future realization of the shocks it will in general be the case that different agents have access to different information the fact that information is dispersed throughout the economy has the potential to cause a misallocation of resources relative to what would be the case if all agents knew everything an efficient allocation of resources will in general require the transfer of information from consumers who have some information about their future demands to producers who can take current actions to mitigate avoidable scarcities or surpluses though many classical and neo classical writers emphasize the informational role of prices the standard marshallian or walrasian model of competitive equilibrium does not involve prices transferring information across traders the purpose of this paper is to show that rational expectations models are radically different from walrasian models in an economy where traders have diverse information this is demonstrated by showing that unlike what occurs in a walrasian equilibrium of an economy with heterogeneous information if there is a complete set of insurance markets and utility is additively separable over time then there exists a rational expectations equilibrium which gives consumers the same allocation as if each consumer has access to all of the economy s information this implies that under the above assumptions a central planner with all the economy s information could not pareto dominate the competitive allocation achieved when traders have diverse information and rational expectations this paper makes no attempt to survey the literature on rational expectations the reader is referred to shiller 1978 barro 1981 for a survey of macroeconomics and rational expectations and radner 1980 for a survey of the microeconomics and mathematical theory of rational expectations this paper will however try to outline the evolution of the rational expectations concept from a notion of optimal forecasting to a virtually complete departure from the walrasian model of equilibrium the rest of this section is devoted to a discussion of pre rational expectations ideas

production uncertainty and the input decision of the competitive firm facing the futures market abstract production uncertainty is introduced into the model of the competitive firm facing the futures market the firm s input decision is shown to be highly sensitive to the nature of the production uncertainty

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

market efficiency and natural selection in a commodity futures market while the literature usually justifies informational efficiency in the context of rationality this article shows informational efficiency by applying the evolutionary idea of natural selection in a dynamic futures market speculators are assumed to merely act upon their predetermined trading types buyer or seller their predetermined fractions of wealth allocated for speculation and their inherent abilities to predict the spot price reflected in their distributions of prediction errors with respect to the spot price this article shows that the proportion of time that the futures price equals the spot price converges to one with probability 1 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

intertemporal commodity futures hedging and the production decision this paper deals with the producer s optimal use of commodity futures in hedging the framework for analysis is an intertemporal consumption and investment model the producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval during the period he faces both price and output uncertainties in applying stochastic dynamic programming methods this paper shows the effect of these risks on his consumption behavior further the paper investigates his optimal hedging positions in the futures market over time and his optimal production decisions finally implications of these results on the futures markets are discussed this paper studies a normative model of the farmer s optimal hedging strategy and consumption behavior in a continuous time framework recent papers for example berck 3 rolfo 18 stoll 21 have analyzed the farmer s hedging strategies in a one period context these papers have provided interesting insights into the farmer s production decisions and the optimal design of futures contracts and markets however in a one period model some rather restrictive conditions are imposed on the individual s behavior for example in these models an individual is assumed to ignore any information arrival process as a result the individual is assumed to adjust neither consumption behavior nor hedging positions to the changing state of the world during the production period these conditions can be relaxed in a continuous time framework in an intertemporal context the farmer s hedging problem may be viewed as follows since the farm income at harvest depends on both the spot price and the output in bushels the farmer is subject to both price and output uncertainties during the production period 1 when the farmer can hedge only in the commodity futures market he cannot eliminate both the price and output uncertainties by any hedging strategy 2 as the farm income represents a significant portion of his wealth he must necessarily hold an undiversified portfolio during the production period therefore in essence the farmer must solve for his investment consumption behavior and his hedging strategy facing the nonmarketable asset problem mayers 14 in a multiperiod framework in this context one can see intuitively the major difference between a one

the myth of incomes policy in the netherlands an assessment is made about whether the dutch government conducted an effective incomes policy in the postwar period targeted wage rate development is compared with actual wage outcomes and an empirical model of wage formation is used to estimate whether wage rates were lower when the incomes policy was on it is concluded that two periods of incomes policy were effective 1955 1959 and 1980 1981 however the net effect of the policy in 1955 1959 was very moderate due to a wage explosion in 1964

dynamic marketing and retention decisions for cow calf producers optimal calf retention and marketing activities for cow calf producers are examined using a expected utility maximizing discrete stochastic programming model steer heifer and corn prices are modeled as stochastic variables the mathematical model is used to consider retention at weaning and yearling stages and marketing alternatives of cash hedging and options results show how calf retention decisions depend upon current profit expected future profit distributions pricing alternatives available and the cow calf producer s aversion to risk

a simple multiperiod minimum risk hedge model a multiperiod hedging model is developed that is simpler than other multiperiod models in the literature the model permits periodic adjustment of the hedge while minimizing the producer s profit variance minimum risk hedge ratios are calculated for steers cows hogs corn and soybeans using the full model with hedge adjustments every two months these ratios are compared to those using the model without periodic hedge adjustments and to a simple single period model the results suggest that simple models may work well for simple hedges while the full model is best for more complex hedging situations such as cross hedges our purpose in this paper is to develop a multiperiod hedging model in which the hedge can be updated each period other multiperiod hedging models e g anderson and danthine karp have substantial data requirements which limit their use as viable hedging tools our aim is to develop a simpler model that will have practical application the model is used to calculate minimum risk hedge ratios for steers cows hogs corn and soybeans and these ratios are compared with hedge ratios based on a multiperiod model in which the hedge cannot be adjusted each period simple minimum risk hedge ratios also are computed for each commodity and compared with the other ratios

fixed rate loan commitments take down risk and the dynamics of hedging with futures this paper develops a normative model to analyze the hedging and fee pricing decisions of a financial institution supplying fixed rate loan commitments to its customers in supplying fixed rate loan commitments the financial institution hereafter referred to as bank is assumed to act as an agent that transforms commitment risk through the use of financial futures contracts while most pre vious loan commitment models have analyzed the interest rate or price risk the bank faces in supplying fixed rate loan commitments they either have ignored or assumed away the loan take down or quantity risk l in general by making a formal fixed rate loan commitment the bank exposes itself to both a price and a quantity risk specifically a formal loan com mitment prespecifies the maximum size of the loan the purpose of the loan of ten project specific as well as the interest rate and fee to be paid by the borrower 14 15 however while a formal loan commitment imposes a contractual re quirement on the bank to supply funds up to a maximum amount at an agreed rate of interest the expected size of the loan to be taken down is often uncertain the reason is that for project specific lines of credit the amount taken down will depend on the future state s of the world that are revealed to the borrower at the end of the commitment period as well as on the limitations and constraints im posed on the use of funds in the loan commitment contract for example construction delays and other market imperfections that hamper a planned invest

investment and hedging under a stochastic yield curve abstract this paper examines portfolio decisions involving both fixed and non fixed income securities two state variables the short term and the long term interest rates fully determine the bonds prices and partly influence the other assets prices we propose first a methodology for determining optimal portfolios in such a context and then use that methodology to solve the portfolio problem of investors whose long term bond holdings are constrained which generates undesirable interest rate risk that are hedged with futures contracts the individual futures positions which involve several hedging components and the futures market equilibrium open interest are derived and analysed

production flexibility stochastic separation hedging and futures prices we study a dynamic model where uncertainty about interim output adjustments causes producers to face price cost and output uncertainty stochastically separable production decisions are independent of the producer s risk preferences and expectations and are based on the prevailing futures price as a certain output price conditions under which futures contracts achieve stochastic separation are established optimal hedging and maturity structure of futures contracts equilibrium futures prices and the effects of futures trading on output are studied the systematic risk premium depends on the product of the futures beta and the covariance of the market return with production revenues article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

informational frictions and commodity markets this paper develops a model with a tractable log linear equilibrium to analyze the effects of informational frictions in commodity markets by aggregating dispersed information about the strength of the global economy among goods producers whose production has complementarity commodity prices serve as price signals to guide producers production decisions and commodity demand our model highlights important feedback effects of informational noise originating from supply shocks and futures market trading on commodity demand and spot prices our analysis illustrates the weakness common in empirical studies on commodity markets of assuming that different types of shocks are publicly observable to market participants

performance of utility based hedges abstract hedgers as investors are concerned with both risk and return however when measuring hedging performance the role of returns and investor risk aversion has generally been neglected in the literature by its focus on minimum variance hedging in this paper we address this by using utility based performance metrics to evaluate the hedging effectiveness of utility based hedges for hedgers with both moderate and high risk aversion together with the more traditional minimum variance approach to examine this for an energy hedger we apply our approach to wti crude oil for three different hedging horizons daily weekly and monthly we find significant differences between the minimum variance and utility based hedging strategies in sample for all frequencies however performance differentials between the different strategies are small and not economically significant out of sample results support these findings across all frequencies