Three essays on behavioral approach to futures markets

Expected utility theory has been the most fundamental theory in the modern finance theory. Due to the growing inconsistency between the theoretical predictions and the empirical observations, economists began to inquire the role of economic theory and adopt the behavioral approach to explain some well-known anomalies. Under the new approach, economics is more of a description for observed human behavior than a prescription of optimal and rational human behavior. Disappointment Aversion and Knightian Uncertainty are two of the most important elements in this approach; both discard some basic assumptions of rational behavior.; In the first chapter, the effect of disappointment aversion on futures hedging is examined. It is found that, a more disappointment averse hedger chooses an optimal position closer to the variance-minimizing hedger than a less disappointment averse agents does. A small disappointment aversion causes a near risk neutral hedger to take a drastically different position. In addition, a more disappointment averse hedger has a lower reference point, which is reflected in his more conservative acts.; The second chapter examines the effect of disappointment aversion on the equilibrium of a commodity futures market. It is shown that disappointment aversion and risk aversion have very similar effects in determining the trading volume, market price and the producer's reference point. When it comes to the speculator's reference point, disappointment aversion and risk aversion produce different impacts. A greater disappointment aversion always affects her reference point negatively whereas a greater risk aversion may elevate her reference point.; The third chapter examines the effects of Knightian uncertainty on a commodity futures market within the Newberry (1982) framework. It is shown that, a Knightian trader acts more conservatively than a non-Knightian trader. In a partial-trade equilibrium, risk aversion and Knightian uncertainty have qualitatively similar effects on the equilibrium price and the equilibrium trading volume. Full-trade and no-trade equilibria are likely to prevail when the producer and the speculator incur different Knightian uncertainty. Herein different impacts of risk aversion and Knightian uncertainty are observed.