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Optimal hedge ratio and elasticity of risk aversion

Author

Listed:
  • Udo Broll

    (Department of Economics, Dresden University of Technology)

  • Jack E. Wahl

    (Department of Finance, University of Dortmund)

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.

Suggested Citation

  • Udo Broll & Jack E. Wahl, 2004. "Optimal hedge ratio and elasticity of risk aversion," Economics Bulletin, AccessEcon, vol. 6(5), pages 1-7.
    • Handle: RePEc:ebl:ecbull:eb-03f30006
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    elasticity of risk aversion;

    JEL classification:

    • F3 - International Economics - - International Finance
    • D2 - Microeconomics - - Production and Organizations

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