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New models of commodity risk hedging according to the behavior of economic decision-makers or Rollover Strategies

Author

Listed:
  • Zoulkiflou Moumouni

    (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)

  • Jules Sadefo-Kamdem

    (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)

Abstract

In static framework, many hedging strategies can be settled following the various hedge ratios that have been developed in the literature. However, it is difficult to choose among them the best the appropriate strategy according the to preference or economic behavior of the decision-maker such as prudence and temperance. This is so even with the hedging effectiveness measure. After introducing a hedging ratio that take into account the prudence and temperance of the decision maker, we propose a ranking based approach to measure the effectiveness using L-moment to classify hedge portfolios, hence hedge ratios, with regard to their performance. Moreover, we deal with the hedging issue in presence of quantity and rollover risks and derive an optimal strategy that depends upon the basis and insurance contract. Such hedging issue includes the relevant risks encountered in practice and we relate how insurance contract, specially designed for production risk could affect the futures hedge. The application on futures prices data at hands shows that taking into account quantity and rollover risks leads to better hedging strategy based on the L-performance effectiveness measure.

Suggested Citation

  • Zoulkiflou Moumouni & Jules Sadefo-Kamdem, 2019. "New models of commodity risk hedging according to the behavior of economic decision-makers or Rollover Strategies," Working Papers hal-02417459, HAL.
  • Handle: RePEc:hal:wpaper:hal-02417459
    Note: View the original document on HAL open archive server: https://hal.umontpellier.fr/hal-02417459
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    References listed on IDEAS

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    Risk Management; Futures Markets; Commodities; Risk Aversion;
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