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The impact of skewness in the hedging decision

✍ Scribed by Scott Gilbert; Samuel Kyle Jones; Gay Hatfield Morris

Publisher
John Wiley and Sons
Year
2006
Tongue
English
Weight
131 KB
Volume
26
Category
Article
ISSN
0270-7314

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✦ Synopsis

The impact of skewness in the hedger's objective function is tested using a model of hedging derived from a third-order Taylor Series approximation of expected utility. To determine the effect of price skewness upon hedging and speculation, analytical results are derived using an example of cotton storage. Findings suggest that when forward risk premiums and price skewness in the spot asset have opposite signs, speculation increases relative to the mean-variance model. When the signs are identical, speculation will decrease, contradicting findings of mean-variance models.

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We thank Gunter Franke and Itzhak Zilcha for helpful discussions. We are particularly grateful to our referees for helping us revise this article, though the usual disclaimer applies.