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Optimal hedge ratio and elasticity of risk aversion

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Author Info
Udo Broll () (Department of Economics, Dresden University of Technology)
Jack E. Wahl () (Department of Finance, University of Dortmund)

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Abstract

We apply the mean-standard deviation paradigm to examine a widely used model of the hedging literature. As the hedging model satisfies a scale and location condition the mean-standard deviation technique provides more intuition for the revision of the firm’s optimum risk taking when price volatility changes. By introducing risk aversion elasticity we describe the interaction of price risk and optimum hedge. We show that with unit risk aversion elasticity optimum hedge ratio is invariant to changes in price volatilities.

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Publisher Info
Article provided by Economics Bulletin in its journal Economics Bulletin.

Volume (Year): 6 (2004)
Issue (Month): 5 ()
Pages: 1-7
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Handle: RePEc:ebl:ecbull:v:6:y:2004:i:5:p:1-7

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Related research
Keywords: elasticity of risk aversion; hedge ratio; two-moment decision model;

Find related papers by JEL classification:
F3 - International Economics - - International Finance
D2 - Microeconomics - - Production and Organizations

References listed on IDEAS
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  1. Wong, Kit Pong, 1996. "Background Risk and the Theory of the Competitive Firm under Uncertainty," Bulletin of Economic Research, Blackwell Publishing, vol. 48(3), pages 241-51, July.
  2. Lajeri, Fatma & Nielsen, Lars Tyge, 1997. "Parametric Characterizations of Risk Aversion and Prudence," CEPR Discussion Papers 1650, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May. [Downloadable!] (restricted)
    Other versions:
  4. Ormiston, Michael B & Schlee, Edward E, 2001. "Mean-Variance Preferences and Investor Behaviour," Economic Journal, Royal Economic Society, vol. 111(474), pages 849-61, October. [Downloadable!] (restricted)
  5. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
    Other versions:
  6. Wagener, Andreas, 2002. "Prudence and risk vulnerability in two-moment decision models," Economics Letters, Elsevier, vol. 74(2), pages 229-235, January. [Downloadable!] (restricted)
  7. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June. [Downloadable!] (restricted)
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