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Hedging With Individual And Index-Based Contracts

  • Mahul, Olivier
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    We examine the optimal hedging strategy with an individual insurance policy, sold at an unfair price, and a fair contract based on an index, which is imperfectly correlated with the individual loss. The tradeoff between transaction costs and basis risk is first analyzed in the expected utility framework in order to highlight the role of the agent's attitude toward risk, and then in the linear mean-variance model to stress the importance of the degree of correlation between the individual loss and the index.

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    File URL: http://purl.umn.edu/22007
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    Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2003 Annual meeting, July 27-30, Montreal, Canada with number 22007.

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    Date of creation: 2003
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    Handle: RePEc:ags:aaea03:22007
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    1. Alarie, Y. & Eeckhoudt, L. & Dionne, G., 1990. "Increases In Risk And The Demand For Insurance," Cahiers de recherche 9021, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
    2. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, June.
    3. Louis Eeckhoudt & Olivier Mahul & John Moran, 2003. "Fixed-Reimbursement Insurance: Basic Properties and Comparative Statics," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(2), pages 207-218.
    4. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    5. Olivier Mahul, 1999. "Optimum Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 75-82.
    6. Darren L. Frechette, 2000. "The Demand for Hedging and the Value of Hedging Opportunities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 897-907.
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