Hedging with regret

Olaf Korn and Marc Oliver Rieger

Journal of Behavioral and Experimental Finance, 2019, vol. 22, issue C, 192-205

Abstract: This paper investigates corporate hedging under regret aversion. Regret-averse firms try to avoid deviations of their hedging policy from the ex post best policy. The study presents a model of a firm that faces uncertain prices and seeks to hedge both profit risk and regret risk with derivatives. It characterizes optimal hedge positions and shows that regret aversion leads to stronger incentives to hedge downside price risk than standard expected utility theory. Regret aversion has a strong effect on the choice of the hedging instrument and provides a preference-based explanation for the use of options in corporate risk management.

Keywords: Regret aversion; Risk management; Hedging; Derivatives (search for similar items in EconPapers)
JEL-codes: D81 G32 G40 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:22:y:2019:i:c:p:192-205

DOI: 10.1016/j.jbef.2019.03.002

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