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Optimal futures heading: Quadratic versus exponential utility functions
Author(s) -
Lien Donald
Publication year - 2008
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.20274
Subject(s) - futures contract , exponential function , quadratic equation , expected utility hypothesis , econometrics , variance (accounting) , economics , exponential utility , heading (navigation) , mathematical economics , mathematics , financial economics , engineering , mathematical analysis , geometry , accounting , aerospace engineering
Although quadratic and exponential utility functions both lead to mean‐variance expected utility analysis, this study demonstrates that the two approaches produce different optimal futures hedging decisions. Specifically, the deviation between the optimal production level and the optimal futures position is always smaller under the exponential utility framework. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28: 208–211, 2008