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Toward a Positive Economic Theory of Hedging

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  • Robert A. Collins

Abstract

The hedging models developed over the last half century are evaluated for their ability to explain the actual hedging behavior of the various economic agents. This evaluation shows a total lack of a reasonable positive model of hedging behavior. While each class of existing models predicts some observed behavior, none is able to predict the broad range of actions that is easily observed in the real world. In this paper I develop such a model and include a plausible and coldly rational economic explanation for why farmers don't hedge at all while merchandisers with identical risk attitudes will fully hedge. Copyright 1997, Oxford University Press.

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  • Robert A. Collins, 1997. "Toward a Positive Economic Theory of Hedging," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 488-499.
    • Handle: RePEc:oup:ajagec:v:79:y:1997:i:2:p:488-499
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    Cited by:

    1. Murray-Prior, Roy B. & Wright, Vic, 2004. "Use of strategies and decision rules by Australian wool producers to manage uncertainty," AFBM Journal, Australasian Farm Business Management Network, vol. 1, pages 1-16.
    2. Brent A. Gloy & Timothy G. Baker, 2002. "The Importance of Financial Leverage and Risk Aversion in Risk-Management Strategy Selection," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 1130-1143.
    3. Vedenov, Dmitry & Power, Gabriel J., 2022. "We don't need no fancy hedges! Or do we?," International Review of Financial Analysis, Elsevier, vol. 81(C).
    4. Power, Gabriel J. & Vedenov, Dmitry, 2023. "Who's afraid of a Texas hedge?," Energy Economics, Elsevier, vol. 127(PB).
    5. Fernandez-Perez, Adrian & Frijns, Bart & Gafiatullina, Ilnara & Tourani-Rad, Alireza, 2022. "Profit margin hedging in the New Zealand dairy farming industry," Journal of Commodity Markets, Elsevier, vol. 26(C).
    6. Garcia, Philip & Nelson, Carl H., 2003. "Engaging Students In Research: The Use Of Structured Professional Dialogue," 2003 Annual meeting, July 27-30, Montreal, Canada 21894, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, July.
    8. Mattos, Fabio & Garcia, Philip & Nelson, Carl, 2008. "Relaxing standard hedging assumptions in the presence of downside risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(1), pages 78-93, February.
    9. Mattos, Fabio & Garcia, Philip & Pennings, Joost M.E., 2008. "Probability weighting and loss aversion in futures hedging," Journal of Financial Markets, Elsevier, vol. 11(4), pages 433-452, November.
    10. Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income Enhancing and Risk Management Properties of Marketing Practices," Working Papers 127653, Cornell University, Department of Applied Economics and Management.

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