This paper presents a manageable and effective way of nesting two popular, yet distinct approaches to obtain optimal hedging ratios - time-series econometrics (GARCH) and dynamic programming (DP). The nested DP-GARCH model is then compared to a DP-GARCH model that accounts for variability in the...

In many studies the assumption is made that traders only encounter one type of price risk. In reality, however, traders are exposed to multiple price risks, and often have several relevant derivative instruments available with which to hedge price uncertainty. In this study, commodity, foreign...

Various bid-ask spread estimators are applied to transaction data from LIFFE commodity futures markets, and the resulting estimates are compared to observed actual bid-ask spreads. Results suggest that actual bid-ask spreads, unlike effective spreads, can be reasonably estimated using...

The effects of volatility of barge and ocean freight prices on prices throughout the international grain-marketing channel are analyzed using a Multivariate GARCH-M model. The model is used to infer the extent to which transportation price risk affects the level of international grain prices....

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when...

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when...

In settings characterized by imperfect information about an underlying state of nature, but where inferences are made sequentially and are publicly observable, decisions may yield a "cascade" in which everyone herds on a single choice. While cascades potentially play a role in a variety of...

Issues of recent interest and controversy regarding bid-ask spreads in commodity futures markets are investigated. First we apply competing spread estimators to open outcry transactions data and compare resulting estimates to observed spreads. This enables market microstructure researchers,...

Two behavioral concepts, loss aversion and mental accounting, have recently been combined to provide a theoretical explanation of the equity premium puzzle. Recent experimental evidence suggests that undergraduate students' behavior is consistent with this "myopic loss aversion" conjecture. Our...

This paper presents an effective way of combining two popular, yet distinct approaches used in the hedging literature dynamic programming (DP) and time-series (GARCH) econometrics. Theoretically consistent yet realistic and tractable models are developed for traders interested in hedging a...