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Abstract

We examine the role that habit plays when producers determine their hedge ratio. Data were collected from U.S. cotton growers in which they indicated their hedging position in 2001 and 2002 as well as their perceived profitability, land ownership structure, and income. To account for heterogeneity, a generalized mixture regres- sion model is used to identify the influence of the determinants of the hedge ratio. Our results identified two segments. In the smaller segment, consisting of 35% of the producers, habit did not affect the hedge ratio; instead, land ownership and perceived profitability were most influential. In the larger segment, consisting of 65% of the producers, the hedge ratio was solely driven by habit. The results show the important role of habit formation in understanding producers’ employed hedge ratio, confirm the importance of heterogeneity, and strengthen the relation- ship between financial structure and market-risk mitigating behavior.

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