A Behavioral Approach Towards Futures Contract Usage

OFOR Working Paper No. 00-08

29 Pages Posted: 3 Nov 2000

See all articles by Joost M. E. Pennings

Joost M. E. Pennings

Maastricht University; Wageningen University and Research (WUR); University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Raymond M. Leuthold

University of Illinois @ Urbana-Champaign

Date Written: October 2000

Abstract

We propose a behavioral decision-making model to investigate what factors, observable as well as unobservable, owner-managers consider regarding futures contract usage. The conceptual model consists of two phases, reflecting the two-stage decision structure of manager's use of futures. In the first phase owner-managers consider whether futures are within the market choice set for the enterprise. In the second phase the owner-manager decides whether or not to initiate a futures position when confronted with a concrete choice situation. In both phases owner-manager's beliefs and perceptions play an important role. The proposed model is tested on a data set of Dutch farmers, based on computer-assisted personal interviews. Because we incorporate latent variables (e.g., perceptions and beliefs) in both phases, we propose an estimation procedure that takes the measurement error of these latent variables explicitly into account. The implications of the behavioral decision-making model for futures contract design are derived.

Suggested Citation

Pennings, Joost M. E. and Leuthold, Raymond M., A Behavioral Approach Towards Futures Contract Usage (October 2000). OFOR Working Paper No. 00-08, Available at SSRN: https://ssrn.com/abstract=248716 or http://dx.doi.org/10.2139/ssrn.248716

Joost M. E. Pennings (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, Limburg 6200MD
Netherlands

HOME PAGE: http://marketing-finance.nl/cv/cvpennings.pdf

Wageningen University and Research (WUR) ( email )

Hollandseweg 1
Wageningen, 6706KN
Netherlands

HOME PAGE: http://marketing-finance.nl/cv/cvpennings.pdf

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

1301 W. Gregory Drive
326 Mumford Hall MC-710
Urbana, IL 61801
United States
217-244-1284 (Phone)
217-333-5538 (Fax)

HOME PAGE: http://marketing-finance.nl/cv/cvpennings.pdf

Raymond M. Leuthold

University of Illinois @ Urbana-Champaign ( email )

1301 W. Gregory Drive
326 Mumford Hall
Urbana, IL 61801
United States
217-333-1810 (Phone)
217-333-5538 (Fax)

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