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Hedging the standard of living via cost of living index futures

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  • Schulz, Rainer

Abstract

People dislike inflation because inflation erodes the real value of future nominal income and wealth. Adjustment of future nominal values via a cost of living index is an appropriate way to handle the problem of real income risk. Nonetheless an important aspect needs more discussion: If markets existed in which real income risks could be traded-would a rational individual always voluntarily purchase protection against such risk? A model is developed to shed some light on this aspect. It shows that the optimal behaviour depends - as expected - on the cost of protection and the risk preferences of the individual.

Suggested Citation

  • Schulz, Rainer, 2000. "Hedging the standard of living via cost of living index futures," SFB 373 Discussion Papers 2000,93, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    • Handle: RePEc:zbw:sfb373:200093
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    References listed on IDEAS

    as
    1. Hanoch, Giora, 1977. "Risk Aversion and Consumer Preferences," Econometrica, Econometric Society, vol. 45(2), pages 413-426, March.
    2. Jeffrey M. Wrase, 1997. "Inflation-indexed bonds: how do they work?," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 3-16.
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    More about this item

    Keywords

    Cost of Living Index; Futures Markets;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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