Abstract: This study examines how ambiguity affects hedging behaviour in crude oil futures markets. I quantify ambiguity by examining variations in uncertain probabilities and identify the effect of an ambiguity shock on hedging behaviour using an instrument variable approach. The impact of ambiguity contrasts with the impact of risk, while both are equally important in terms of economic and statistical significance. Crucially, the analysis reveals, heterogeneity across different hedger sub-categories: Swap dealers react averse to ambiguity shocks and increase hedging demand whereas the activity of commodity producers is reduced. The findings in this paper support classical hedging theories in commodity markets, indicating a rise in hedging activity in uncertain conditions.

Available at SSRN

Joint work with Elissa Ana Maria Iorgulescu

Abstract: Commodity options enhance information flow and risk management in futures markets. This paper investigates the impact of options trading on price volatility and hedging effectiveness in grain futures markets by analyzing the 1936 ban on commodity options trading in the United States. Utilizing newly collected data for wheat and corn futures from Chicago and London (1934-1939), we employ a difference-indifferences approach to compare treated (Chicago) and control (London) markets. Our findings show that active options trading is associated with reduced price volatility and improved hedging effectiveness in futures markets. Following the 1936 ban, Chicago futures experienced a significant but temporary shortterm increase in volatility and a decline in hedging effectiveness, highlighting the essential role of options trading in stabilizing futures markets and facilitating efficient information transmission. These results offer important insights for regulatory policies governing derivative markets.

Available at SSRN

Joint work with Elissa Ana Maria Iorgulescu

Abstract: This study examines how affective states, referring to individuals' mood, psychological condition, and ability to process uncertainty, influence household stock market participation. Using mental health data from the German SocioEconomic Panel (SOEP) as a proxy for affective states, we show that better mental health significantly increases the likelihood of stock ownership, while symptoms of depression and chronic worry reduce participation. Our estimates suggest that a one-standarddeviation improvement in overall mental health translates to approximately 120,000 stock market entering households annually in Germany. To address endogeneity, we exploit the COVID-19 pandemic as a natural experiment using a Difference-inDifferences Instrumental Variables (DiD-IV) approach. We find that individuals with weaker pre-crisis social networks experienced larger declines in mental health during the pandemic and are significantly less likely to become stockholders than those with stronger social ties. Conceptually, we identify three channels through which mental health affects financial decision-making: external beliefs (expectations about returns), internal beliefs (perceived capability to invest), and preferences (risk tolerance).

Available at SSRN