Premium
Separation and Hedging Results with State‐Contingent Production
Author(s) -
James Robert G.,
Quiggan John
Publication year - 1997
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/1468-0335.00073
Subject(s) - futures contract , production (economics) , economics , hedge , microeconomics , townsend , separation (statistics) , state (computer science) , econometrics , financial economics , computer science , mathematics , statistics , ecology , physics , algorithm , quantum mechanics , biology
A state‐contingent model of production under uncertainty is developed and compared with more traditional models of production under uncertainty. Producer behaviour with both production and price risk, in the presence and in the absence of futures and forward markets, is analysed in this state‐contingent framework. Conditions for the optimal hedge to be positive or negative are derived. We also show that, under plausible conditions, a risk‐averse producer facing price uncertainty and the ability to hedge price risk will never willingly adopt a non‐stochastic technology. New separation results, which hold in the presence of both price and production risk, are then developed. These separation results generalize Townsend’s spanning results by reducing the number of necessary forward markets by one.