An evolutionarily stable strategy and the critical point of hog futures trading entities based on replicator dynamic theory: 2006–2015 data for China’s 22 provinces

Abstract

Although frequent fluctuations in domestic hog prices seriously affect the stability and robustness of the hog supply chain, hog futures (an effective hedging instrument) have not been listed in China. To better understand hog futures market hedging, it is important to study the steady state of intersubjective bidding. This paper uses evolutionary game theory to construct a game model between hedgers and speculators in the hog futures market, and replicator dynamic equations are then used to obtain the steady state between the two trading entities. The results show that the steady state is one in which hedgers adopt a “buy” strategy and speculators adopt a “do not speculate” strategy, but this type of extreme steady state is not easily realized. Thus, to explore the rational proportion of hedgers and speculators in the evolutionary stabilization strategy, bidding processes were simulated using weekly average hog prices from 2006 to 2015, such that the conditions under which hedgers and speculators achieve a steady state could be analyzed. This task was performed to achieve the stability critical point, and we show that only when the value of λ is satisfied and the conditions of hog futures price changes and futures price are satisfied can hedgers and speculators achieve a rational proportion and a stable hog futures market. This market can thus provide a valuable reference for the development of the Chinese hog futures market and the formulation and guidance of relevant departmental policies.

The Effect of Hog Futures in Stabilizing Hog Production

“…Hog futures help farmers hedge against hog price risks and reduce the impact of hog price fluctuations on hog production volatility. Since hog breeding entities are affected by market prices [4,7], based on the risk-hedging function of hog future [39], hog enterprises utilize hog future to hedge the risk [40] and stabilize their production. As the hog fattening market is nearly perfectly competitive [7], hog enterprises are passive recipients of the market price.…”

“…For example, hog and pork demand enterprises can more accurately forecast future market demand based on their historical experience [42] and are the primary drivers of pricing. There are other participants in the futures market, such as professional investors [40], and speculators [43]. The price of the hog future is a rational outcome of a multi-party game [40].…”

“…There are other participants in the futures market, such as professional investors [40], and speculators [43]. The price of the hog future is a rational outcome of a multi-party game [40]. With the combined forces of the participants, the hog future can reasonably reflect the level of hog supply and demand in the coming period.…”