Optimal hedging with a subjective view: An empirical bayesian approach

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The standard optimal hedging model has been the preferred theoretical model of normative hedging behavior. In empirical applications, the model is often implemented with the parameter certainty equivalent (PCE) procedure. However, the PCE procedure completely ignores parameter estimation risk and subjective views. We develop an "empirical" Bayesian optimal hedging model that not only effectively accommodates parameter estimation risk, but also provides hedgers with a theoretically intuitive yet quantitatively rigorous framework to blend their subjective views and a "marketwide" or "firmwide" consensus in determining optimal hedging positions (ratios).

Original languageEnglish (US)
Pages (from-to)918-930
Number of pages13
JournalAmerican Journal of Agricultural Economics
Issue number4
StatePublished - Nov 2005


  • Bayesian analysis
  • Optimal hedging
  • Parameter estimation risk
  • Subjective view

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics


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