Economic Hedging Portfolios
AbstractIn this paper we study portfolios that investors hold to hedge economic risks.Using a model of state-dependent utility, we show that agents economic hedging portfolios can be obtained by an intuitively appealing, risk aversion-weighted approximate replication of the economic risk variables using the investment opportunity set, as opposed to the unweighted hedging demand obtained in the traditional mean-variance framework.We find that agents across a broad range of levels of risk aversion are willing to pay significant compensations for hedges against inflation risk, real interest-rate risk, and dividend-yield risk.Furthermore, our results show that all economic risk variables we consider require significant, often risk aversion-dependent hedging adjustments with respect to one or more securities.Moreover, we analyze investors speculative positions and find that hedges against economic risks may potentially explain the anomalies found in stock markets as well as the term and default premiums in bond markets.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2003-102.
Date of creation: 2003
Date of revision:
Contact details of provider:
Web page: http://center.uvt.nl
hedging; risk; investment;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Balduzzi, Pierluigi & Kallal, Hedi, 1997. " Risk Premia and Variance Bounds," Journal of Finance, American Finance Association, vol. 52(5), pages 1913-49, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If references are entirely missing, you can add them using this form.