Production and hedging decisions under regret aversion |
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| Institution: | 1. College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing, China;2. Department of Economics, Hong Kong Baptist University, Hong Kong;3. Business School of Ningbo University, Ningbo, China;4. School of Mathematics and Statistics, Xi''an Jiaotong University, Xi''an, China;1. Center for Energy Development and Environment Protection Strategy Research, Faculty of Science, Jiangsu University, Zhenjiang, Jiangsu 212013, China;2. School of Mathematical Sciences, Nanjing Normal University, Nanjing 210046, China;1. Glorious Sun School of Business and Management, DongHua University, Shanghai 200051, China;2. School of Electronic Information and Electrical Engineering, Shanghai Jiao Tong University, Shanghai 200240, China;3. Antai College of Economics & Management, Shanghai Jiao Tong University, Shanghai 200052, China;1. Centre for the Health Economy, Macquarie University, NSW, Australia;2. Department of Economics, Monash University, VIC, Australia |
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| Abstract: | In this paper, we investigate regret-averse firms' production and hedging behaviors. We first show that the separation theorem is still alive under regret aversion by proving that regret aversion is independent of the level of optimal production. On the other hand, we find that the full-hedging theorem does not always hold under regret aversion as the regret-averse firms take hedged positions different from those of risk-averse firms in some situations. With more regret aversion, regret-averse firms will hold smaller optimal hedging positions in an unbiased futures market. Furthermore, contrary to the conventional expectations, we show that banning firms from forward trading affects their production level in both directions. |
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