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Disappointment aversion equilibrium in a futures market
Author(s) -
Lien Donald,
Wang Yaqin
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10057
Subject(s) - disappointment , economics , volatility (finance) , futures contract , loss aversion , risk aversion (psychology) , financial economics , prospect theory , microeconomics , expected utility hypothesis , psychology , social psychology
This article examines the effect of disappointment aversion on the equilibrium in a commodity futures market.Consider a commodity market with a producer and a speculator. We show that the equilibrium price is positivelyrelated to either agent's risk or disappointment aversion, and to the market volatility. The market tradingvolume is positively related to the producer's risk or disappointment aversion, but negatively related tothe speculator's risk or disappointment aversion. The producer lowers his or her reference point inresponse to an increase in the risk aversion or disappointment aversion of either agent, and to an increase inspot price volatility. The speculator raises his or her reference point when the producer becomes more riskaverse or disappointment averse, or when the spot price becomes more volatile. A moredisappointment‐averse speculator will lower his or her reference point. However, a morerisk‐averse speculator raises (lowers) the reference point if he or she is less(more) risk averse than the producer. Numerical examples are provided to further support the aboveanalytical results. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:135–150, 2003