Hedging mean-reverting commodities.

Article


Broll, U., Clark, E. and Lukas, E. 2010. Hedging mean-reverting commodities. IMA Journal of Management Mathematics. 21 (1), pp. 19-26. https://doi.org/10.1093/imaman/dpp013
TypeArticle
TitleHedging mean-reverting commodities.
AuthorsBroll, U., Clark, E. and Lukas, E.
Abstract

This paper uses the expected utility framework to examine the optimal hedging decision for commodities with mean-reverting price processes. The derived results show that when commodity prices follow a mean-reverting process, the optimal hedge ratio differs significantly from the classical results found under standard geometric Brownian motion. Hence, a failure to accommodate mean reversion when it exists can lead to systematic biases in hedging decisions.

PublisherOxford University Press (OUP)
Institute of Mathematics and its Applications
JournalIMA Journal of Management Mathematics
ISSN1471-678X
Electronic1471-6798
Publication dates
Online25 Jun 2009
PrintJan 2010
Publication process dates
Submitted02 Jul 2008
Accepted22 May 2009
Deposited02 Mar 2010
Output statusPublished
Digital Object Identifier (DOI)https://doi.org/10.1093/imaman/dpp013
LanguageEnglish
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