The traditional hedging model revisited with a non-observable convenience yield

Constantin Mellios , Pierre Six (1)

1 Pôle Finance Responsable - Rouen Business School

This article examines the hedging of constrained commodity positions with futures contracts. We extend the study of Adler and Detemple (1988 a,b) to include a partial information framework where the convenience yield is not observable. As a consequence, futures prices depend on investor's beliefs regarding the value of the convenience yield, and every component of the hedge is impacted by thee beliefs. We achieve a decomposition of the demand that clarifies the impact on the optimal hedge of the beliefs, the spot price and the risk-free rate. This decomposition is crucial to understand our example that examines the case of the copper market.

Mots clés: partial information; hedging demand; convenience yield; commodity futures markets; market prices of risk; interest rates

Domaines: Gestion et management

Constantin Mellios, Pierre Six. The traditional hedging model revisited with a non-observable convenience yield. Financial Review, 2011, Vol. 46 (Issue 4), pp. 569-593. ⟨10.1111/j.1540-6288.2011.00312.x⟩. ⟨hal-00659232⟩