Disappointment aversion equilibrium in a futures market

✍ Scribed by Donald Lien; Yaqin Wang

• Publisher: John Wiley and Sons
• Year: 2002
• Tongue: English
• Weight: 170 KB
• Volume: 23
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10057

✦ Synopsis

Abstract

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 positively
related to either agent's risk or disappointment aversion, and to the market volatility. The market trading
volume is positively related to the producer's risk or disappointment aversion, but negatively related to
the speculator's risk or disappointment aversion. The producer lowers his or her reference point in
response to an increase in the risk aversion or disappointment aversion of either agent, and to an increase in
spot price volatility. The speculator raises his or her reference point when the producer becomes more risk
averse or disappointment averse, or when the spot price becomes more volatile. A more
disappointment‐averse speculator will lower his or her reference point. However, a more
risk‐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 above
analytical results. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:135–150, 2003