The effects of skewness and kurtosis on production and hedging decisions: a Gram-Charlier expansion approach
Abstract In this study, we propose a Gram-Charlier expansion approach to investigate the impact of skewness and kurtosis on production and hedging decisions. Consistent with the existing literature, we find that skewness and kurtosis do not affect decisions regarding optimal production; however, the...
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SpringerOpen
2025-01-01
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| Series: | Financial Innovation |
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| Online Access: | https://doi.org/10.1186/s40854-024-00680-w |
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| author | Xuejun Jiang Lingju Cheng Xinjie Dai |
| author_facet | Xuejun Jiang Lingju Cheng Xinjie Dai |
| author_sort | Xuejun Jiang |
| collection | DOAJ |
| description | Abstract In this study, we propose a Gram-Charlier expansion approach to investigate the impact of skewness and kurtosis on production and hedging decisions. Consistent with the existing literature, we find that skewness and kurtosis do not affect decisions regarding optimal production; however, they significantly influence optimal hedging decisions. We observe that positive skewness with platykurtic spot prices or negative skewness with leptokurtic spot prices often leads to over-hedging when the initial forward contract price exceeds its expected value. Conversely, under-hedging is expected when the initial forward contract price falls below its expected value. In other conditions, skewness can either promote or impede speculative future trading. Using the Gram-Charlier expansion of the spot price density function, we find that optimal future positions depend on forward prices, the hedgers’ risk preference, and the spot price distribution. Simulations validate our findings on the impact of skewness and kurtosis on future hedging. Finally, we analyze of a cotton storage and forward contracting dataset to illustrate the application of our methodology and support our theoretical results. |
| format | Article |
| id | doaj-art-30b74232edce42999765bc0ba4b4581a |
| institution | Kabale University |
| issn | 2199-4730 |
| language | English |
| publishDate | 2025-01-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Financial Innovation |
| spelling | doaj-art-30b74232edce42999765bc0ba4b4581a2025-02-02T12:37:49ZengSpringerOpenFinancial Innovation2199-47302025-01-0111111710.1186/s40854-024-00680-wThe effects of skewness and kurtosis on production and hedging decisions: a Gram-Charlier expansion approachXuejun Jiang0Lingju Cheng1Xinjie Dai2Department of Statistics and Data Science, Southern University of Science and TechnologyCollege of Mathematics and Data Science, Minjian UniversityFortress Investment GroupAbstract In this study, we propose a Gram-Charlier expansion approach to investigate the impact of skewness and kurtosis on production and hedging decisions. Consistent with the existing literature, we find that skewness and kurtosis do not affect decisions regarding optimal production; however, they significantly influence optimal hedging decisions. We observe that positive skewness with platykurtic spot prices or negative skewness with leptokurtic spot prices often leads to over-hedging when the initial forward contract price exceeds its expected value. Conversely, under-hedging is expected when the initial forward contract price falls below its expected value. In other conditions, skewness can either promote or impede speculative future trading. Using the Gram-Charlier expansion of the spot price density function, we find that optimal future positions depend on forward prices, the hedgers’ risk preference, and the spot price distribution. Simulations validate our findings on the impact of skewness and kurtosis on future hedging. Finally, we analyze of a cotton storage and forward contracting dataset to illustrate the application of our methodology and support our theoretical results.https://doi.org/10.1186/s40854-024-00680-wForward contractHedgingSkewness and kurtosisGram-Charlier distribution |
| spellingShingle | Xuejun Jiang Lingju Cheng Xinjie Dai The effects of skewness and kurtosis on production and hedging decisions: a Gram-Charlier expansion approach Financial Innovation Forward contract Hedging Skewness and kurtosis Gram-Charlier distribution |
| title | The effects of skewness and kurtosis on production and hedging decisions: a Gram-Charlier expansion approach |
| title_full | The effects of skewness and kurtosis on production and hedging decisions: a Gram-Charlier expansion approach |
| title_fullStr | The effects of skewness and kurtosis on production and hedging decisions: a Gram-Charlier expansion approach |
| title_full_unstemmed | The effects of skewness and kurtosis on production and hedging decisions: a Gram-Charlier expansion approach |
| title_short | The effects of skewness and kurtosis on production and hedging decisions: a Gram-Charlier expansion approach |
| title_sort | effects of skewness and kurtosis on production and hedging decisions a gram charlier expansion approach |
| topic | Forward contract Hedging Skewness and kurtosis Gram-Charlier distribution |
| url | https://doi.org/10.1186/s40854-024-00680-w |
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