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Dynamic Hedging of Real Wealth Risk

Author

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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.

Suggested Citation

  • Schubert, Stefan & Broll, Udo, 2005. "Dynamic Hedging of Real Wealth Risk," Dresden Discussion Paper Series in Economics 01/05, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    • Handle: RePEc:zbw:tuddps:0105
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    File URL: https://www.econstor.eu/bitstream/10419/22718/1/ddpe200501.pdf
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    Citations

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    Cited by:

    1. Kanas, Angelos, 2014. "Bond futures, inflation-indexed bonds, and inflation risk premium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 82-99.

    More about this item

    Keywords

    wealth; asset price; dynamic hedging; optimum consumption;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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