**OFOR Recent and Forthcoming Publications**

**
Mattos, F., P. Garcia** and C.H. Nelson.
(Forthcoming) “Relaxing Standard Hedging Assumptions in the Presence of Downside
Risk.” *Quarterly Review of Economics and Finance*.

**Abstract**

We analyze how the introduction of a downside risk measure and less restriction assumptions in the standard hedging problem changes the optimal hedge and the opportunity costs of not hedging. Based on a dataset of futures and cash returns for soybeans and S&P 500 returns, the findings indicate that the optimal hedge changes considerably when a one-sided risk measure is adopted and standard assumptions are relaxed. Further, the results suggest that in a downside risk framework with realistic hedging assumptions there is little or no incentive for producers to hedge as the opportunity cost of not hedging is small.

**Egelkraut, T.M. and P. Garcia**.
(Forthcoming) “Predicting S&P 500 Volatility for Intermediate Time Horizons
using Implied Forward Volatility.” *Applied Economics Letters*.

** Abstract**

This paper finds that the implied forward volatility of S&P 500 futures options contains significant explanatory power regarding subsequent realized volatility during intermediate future time intervals. It provides rational, unbiased, and informationally efficient predictions and dominates all alternative volatility forecasts considered.

**
Egelkraut, T.M., P. Garcia** and B.J.
Sherrick. (Forthcoming) “The Term Structure of the Implied Forward Volatility:
Recovery and Informational Content in Corn Options.” *American Journal of
Agricultural Economics*.

** Abstract**

Using a flexible method, we develop the term structure of volatility implied by corn futures options with differing maturities, and evaluate its ability to predict subsequent realized price volatility. The implied forward volatilities anticipate realized volatility well. For the nearby interval, the implied forward volatilities provide unbiased forecasts, and are superior to forecasts based on historical volatilities. For more distant intervals, early-year options predict the direction and magnitude of future volatility changes about as well as a three-year moving average and better than a naïve forecast. However, later-year options display less forecast power in part due to reduced trading activity.

**
Frank, J.M. and P. Garcia**.
(Forthcoming) “Time-Varying Premium? Further Evidence in Agricultural Futures
Markets.” *Applied Economics*.

**Abstract**

Research has provided mixed results regarding the presence of a time-varying risk premium in agricultural futures markets. In this paper we test for the presence of a time-varying risk premium focusing on the properties of the underlying data. Our results show that accounting for the structural break in the 1970s plays a key role in the findings. In contrast to recent research, we find only limited evidence of time-varying risk premium. For a two-month horizon the corn, soybean meal, and hog markets show no signs of a risk premium, while very weak support for a time-varying premium emerges in live cattle. For the four-month horizon, no evidence of a time-varying risk premium appears for any of the markets.

*
*

**Mattos, F., P. Garcia**
and C.H. Nelson. (Forthcoming) “Relaxing
Standard Hedging Assumptions in the Presence of Downside Risk.”
*Quarterly
Review of Economics and Finance*.*
***
**

**Abstract**

We analyze how the introduction of a downside risk measure
and less restriction assumptions in the standard hedging problem changes the
optimal hedge and the opportunity costs of not hedging.
Based on a dataset of futures and cash returns for soybeans and S&P 500
returns, the findings indicate that the optimal hedge changes considerably when
a one-sided risk measure is adopted and standard assumptions are relaxed.
Further, the results suggest that in a downside risk framework with
realistic hedging assumptions there is little or no incentive for producers to
hedge as the opportunity cost of not hedging is small.

**Pennings, J.M.E.**, O. Isengildina, S.H. Irwin,
**P. Garcia, **and W.E. Kuiper (forthcoming). “Producers’ Complex Risk
Management Decisions”
*Agribusiness:
An International Journal*.

**Abstract**

Producers have a wide
variety of risk management instruments available, making their choice complex.
The ways producers deal with this complexity can vary and may influence
the impact that the determinants such as risk aversion have on their choices.
A recently developed choice bracketing framework recognizes that
producers are unable to evaluate all alternatives simultaneously and that to
manage a complex task they often group or bracket individual alternatives and
their consequences together in choice sets.
Data on 1,105 U.S. producers show that producers do not use all available
combinations of risk management tools and that the influence of the determinants
of producer’s risk management decisions are not necessarily the same across risk
management strategies within and across bracketing levels.
The findings may help resolve puzzling results on the role that
well-known determinants of risk management behavior have on producers’ choices,
extending knowledge on producers’ risk management behavior.
Further the findings have managerial implications for policy makers and
agribusiness companies that provide risk management services.

Kim, M.K., **P. Garcia**, and **R.M. Leuthold**
(forthcoming). “Managing Price Risks using Futures Markets and Local Polynomial
Kernel Forecasts.”
*Applied Economics*.*
*

**Abstract**

This study contributes to
understanding price risk management through hedging strategies in a forecasting
context. A relatively new
forecasting method, nonparametric local polynomial kernel (LPK), is used
to
forecast prices and to generate *ex ante*
hedge ratios. The selective
multiproduct hedge based on the LPK price and hedge ratio forecasts is in
general found to be better than continuous hedging, no hedging and alternative
forecasting procedures. Selective
multivariate hedging using the LPK is found to improve hog producer’s
expected
returns. The findings indicate that
combining hedging with forecasts, especially when using the LPK procedure, can
improve price risk management.

**Mattos, F., P. Garcia** and
**J.M.E. Pennings** (forthcoming).
“Probability Distortion and Loss Aversion in Futures Hedging.”
*Journal of Financial Markets.*

**Abstract**

We analyze how the
introduction of probability weighting and loss aversion in a futures hedging
model affects decision making. Analytical findings indicate that probability
weighting alone always affects optimal hedge ratios, while loss and risk
aversion only have an impact when probability weighting exists. In the presence
of probability weighting, simulation results for a relevant range of parameter
values suggest that probability weighting is dominant; changes in probability
weighting affect hedge ratios relatively more than changes in loss and risk
aversion. When decisions are made independently, loss aversion has a relatively
small impact on hedge ratios for all parameter values and risk aversion becomes
important for only a narrow range of risk coefficients which produce implausible
speculative behavior. When prior losses and gains affect behavior, hedging is
influenced most by prior outcomes that influence risk attitudes, but the effect
is somewhat less than the effects of changes in probability weighting.

**Frank, J., P. Garcia**, and S.H. Irwin (forthcoming). “To What
Surprises Do Hog Futures Markets Respond?” *
Journal of Agriculture and Applied Economics*.

**Abstract**

We re-assess the effect of
new information in the Hogs and Pigs Reports (*HPR*)
focusing on rationality of announcements and alternative surprises.
*HPR* announcements are irrational estimates of final estimates, and
market expectations are irrational estimates of
*HPR* numbers. Using the market’s best forecast and incorporating
final estimates, we modify conventional information measures. Despite
differences as large as 33 cents/cwt in price response, statistical findings
suggest there is little to differentiate among the surprise measures. Regardless
the message that *HPR* provides new
information to the market is strongly supported.
On balance, marketing (breeding) information has a larger effect on
short-term (long-term) price changes.

Woodard, J.D. and
**P. Garcia** (forthcoming). “Basis Risk
and Weather Hedging Effectiveness.” *Review
of Agricultural Finance*.

**Abstract**

Basis risk is cited as a
primary concern for implementing weather hedges.
Using

Woodard, J.D. and **P.
Garcia** (forthcoming). “Weather Derivatives, Spatial Aggregation and Systemic
Insurance Risk: Implications for
Reinsurance Hedging.”
*Journal of Agricultural and Resource
Economics*.

**Abstract**

Previous studies identify
limited potential efficacy of weather derivatives in hedging agricultural
exposures. In contrast to earlier
studies which investigate the problem at low levels of aggregation, we find
using straight forward temperature contracts that better weather hedging
opportunities exist at higher levels of spatial aggregation.
Aggregating production exposures reduces idiosyncratic (i.e. localized or
region specific) risk, leaving a greater proportion of the total risk in the
form of systemic weather risk which can be effectively hedged using weather
derivatives. The aggregation effect
suggests that the potential for weather derivatives in agriculture may be
greater than previously thought, particularly for aggregators of risk such as
re/insurers.