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Dynamic Hedging of Real Wealth Risk

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  • Schubert, Stefan
  • Broll, Udo

Abstract

International and national investors are often exposed to real wealth risks, stemming from volatile asset prices and inflation uncertainty, making it difficult to stabilize consumption patterns. However, investors can enter futures markets to hedge against these risks. The paper develops a simple continuous-time dynamic model, where the evolution of asset price, price level and futures price and hence real wealth is stochastic. For a risk averse investor, optimal consumption and hedging strategy are derived and discussed. It is shown that hedging increases the investor's wellbeing in terms of intertemporal utility of consumption. --

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Bibliographic Info

Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 01/05.

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Date of creation: 2005
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Handle: RePEc:zbw:tuddps:0105

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Keywords: wealth; asset price; dynamic hedging; optimum consumption;

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