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Production and Anticipatory Hedging under Time‐Inconsistent Preferences
Author(s) -
Lien Donald,
Yu ChiaFeng Jeffrey
Publication year - 2015
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.21697
Subject(s) - production (economics) , hedge , economics , ex ante , microeconomics , value (mathematics) , distribution (mathematics) , financial economics , computer science , mathematics , ecology , mathematical analysis , machine learning , biology , macroeconomics
This paper analyzes the production and hedging decisions of a competitive firm under price uncertainty and time‐inconsistent preferences. We show that the firm would over‐hedge and the output choice would be affected by the firm's preferences and the price distribution, thereby identifying a novel circumstance under which the full‐hedge theorem and the separation theorem may fail. Furthermore, when the firm can hedge at the same time as production or ahead of production, ex ante firm value is higher in the former case, suggesting that planning ahead for price risk may backfire in the presence of time‐inconsistent preferences. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:961–985, 2015