DOES SEPARATION THEOREM EXPLAIN WHY FARMERS HAVE SO LITTLE INTEREST IN FUTURES MARKETS?

A farm financial model with leverage and investment in two farm enterprises is specified. The model is extended to incorporate futures hedging and the Separation Theorem is used to show that optimal hedging is zero. The assumption of a risk-free asset is relaxed and, while this leads to a violation of the Separation Theorem, the result that optimal hedging is zero is maintained providing that futures markets are efficient. It is concluded that if capital markets are efficient then farmers will have little interest in futures markets except to speculate.


Subject(s):
Issue Date:
1999
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/12933
Total Pages:
14
Series Statement:
Working Paper 99-1




 Record created 2017-04-01, last modified 2017-08-23

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