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Optimal Hedging under Intertemporally Dependent Preferences

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  • Briys, Eric
  • Crouhy, Michel
  • Schlesinger, Harris

Abstract

This paper examines optimal hedging behavior in a market where preferences for current consumption are partly determined by the consumer's past consumption history. The model considers an individual exposed to price risk, who allocates wealth between consumption and futures contracts over a (continuous-time) finite planning horizon. The speculative component of the hedge ratio is shown to be smaller and the consumption path smoother than in models where preferences are separable over time. Some comparative-static properties of the hedge ratio are also examined. Copyright 1990 by American Finance Association.

Suggested Citation

  • Briys, Eric & Crouhy, Michel & Schlesinger, Harris, 1990. "Optimal Hedging under Intertemporally Dependent Preferences," Journal of Finance, American Finance Association, vol. 45(4), pages 1315-1324, September.
    • Handle: RePEc:bla:jfinan:v:45:y:1990:i:4:p:1315-24
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    Cited by:

    1. Fouda, Henri & Kryzanowski, Lawrence & Chau To, Minh, 2001. "Futures market equilibrium with heterogeneity and a spot market at harvest," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 805-824, May.
    2. Röthig, Andreas, 2008. "The Impact of Backwardation on Hedgers' Demand for Currency Futures Contracts: Theory versus Empirical Evidence," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35698, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    3. Udo Broll & B. Michael Gilroy & Elmar Lukas, 2007. "Managing Credit Risk With Credit Derivatives," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-13.
    4. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, October.
    5. Mellios, Constantin & Six, Pierre & Lai, Anh Ngoc, 2016. "Dynamic speculation and hedging in commodity futures markets with a stochastic convenience yield," European Journal of Operational Research, Elsevier, vol. 250(2), pages 493-504.
    6. Röthig, Andreas, 2008. "The impact of backwardation on hedgers' demand for currency futures contracts: theory versus empirical evidence," Darmstadt Discussion Papers in Economics 190, Darmstadt University of Technology, Department of Law and Economics.
    7. Stefan Franz Schubert & Udo Broll, 2015. "Consumption, inflation risk and dynamic hedging," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(2), June.

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