Post by Sapphire Capital on Jan 28, 2009 22:01:49 GMT 4
Hedging Mean-Reverting Commodities
Udo Broll
Dresden University of Technology - Faculty of Economics and Business Management
Ephraim Alois Clark
Middlesex University - Business School
Elmar Lukas
University of Paderborn - Faculty of Business Administration, Economics and Business Computing
November 1, 2008
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 and investment decisions respectively.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1295909_code447846.pdf?abstractid=1295909&mirid=1
Udo Broll
Dresden University of Technology - Faculty of Economics and Business Management
Ephraim Alois Clark
Middlesex University - Business School
Elmar Lukas
University of Paderborn - Faculty of Business Administration, Economics and Business Computing
November 1, 2008
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 and investment decisions respectively.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1295909_code447846.pdf?abstractid=1295909&mirid=1