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Hedging to market‐wide shocks and competitive selection

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  • Richard Friberg
  • Isak Trygg Kupersmidt

Abstract

This paper examines hedging against a large market‐wide shock in a model with heterogeneous firms and sunk costs of entry. If hedging is voluntary only the most efficient firms hedge against this shock, a finding in line with empirical evidence but at odds with standard motivations for risk management. Hedging affects the critical level of the marginal cost needed to operate in the market. A setting with mandatory hedging is associated with stronger competition than when hedging is voluntary which, in turn, is associated with stronger competition than when hedging is unavailable.

Suggested Citation

  • Richard Friberg & Isak Trygg Kupersmidt, 2023. "Hedging to market‐wide shocks and competitive selection," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(2), pages 450-466, April.
    • Handle: RePEc:bla:jemstr:v:32:y:2023:i:2:p:450-466
    DOI: 10.1111/jems.12504
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