How to Hedge Selectively: A Bayesian Approach
نویسندگان
چکیده
A Bayesian optimal hedging model is developed to quantitatively analyze selective hedging behavior. Numerical results confirm that subjective market views can have a substantial impact on a hedger’s optimal position. The impact is most evident when the hedger speculates on future market price directions and/or is pessimistic about the effectiveness of hedging, i.e., a breakdown in the correlation among different markets. The results offer new insight into selective hedging behavior and contribute to explaining the large cross-sectional and timeseries variation of hedging positions often observed in practice.
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