Deriving Optimal Portfolios for Hedging Housing Risk

Households that contemplate moving to different cities or trading up/down in the future are exposed to substantial housing risk. In order to mitigate this risk, we derive optimal portfolios using CME housing futures. Housing investment risk is hedged by selling housing futures amounting to the full value of the home. Housing consumption risk is hedged by buying housing futures in each city where the household might move. The size of the hedges depends on the probability of moving, on home values, and on labor income in each region. The hedging demands offset each other when the household intends to live in the same home indefinitely.     

最优动态汇率风险套期保值模型研究

构建一个最优动态汇率风险套期保值理论模型,并将其套期保值效率与静态策略进行实证对比.采用对角BEKK模型来捕捉货币现货与期货市场的交互影响,从而刻画风险最小化套期比率的动态特征,结果表明,套期保值能减少汇率风险,但具体的套期保值策略的效率高低排序与避险频率相关.     

Correlation Risk and Optimal Portfolio Choice

We develop a new framework for multivariate intertemporal portfolio choice that allows us to derive optimal portfolio implications for economies in which the degree of correlation across industries, countries, or asset classes is stochastic. Optimal portfolios include distinct hedging components against both stochastic volatility and correlation risk. We find that the hedging demand is typically larger than in univariate models, and it includes an economically significant covariance hedging component, which tends to increase with the persistence of variance–covariance shocks, the strength of leverage effects, the dimension of the investment opportunity set, and the presence of portfolio constraints.     

Handling Weather Related Risks Through the Financial Markets: Considerations of Credit Risk, Basis Risk, and Hedging

The profits of many businesses are strongly affected by weather related events, and insurance against weather related risks (acts of God) has been a traditional domain for transfer of (certain) of these risks. Recent innovations in the capital market have now provided financial instruments to transfer and hedge some of these risks. Unlike insurance solutions, however, using these financial derivative instruments creates a situation in which the return to the purchaser of the instrument is no longer perfectly correlated with the loss experienced. Such a mismatch creates new risks which must be examined and evaluated as part of ascertaining cost effective risk management plans. Two newly engendered risks, basis risk (the risk created by the fact that the return from the financial derivative is a function of weather at a prespecified geographical location which may not be identical to the location of the firm) and credit risk (the risk that the counterparty to the derivative contract may not perform), are analyzed in this article. Using custom tailored derivatives from the over the counter market can decrease basis risk, but increases credit risk. Using standardized exchange traded derivatives decreases credit risk but increases basis risk. Here also the effectiveness of using hedging methods involving forwards and futures having linear payoffs (linear hedging) and methods using derivatives having nonlinear payoffs such as those involving options (nonlinear hedging) for the purpose of hedging basis risk are examined jointly with credit risk.     

Bank Funding Risks,Risk Aversion,and the Choice of Futures Hedging Instrument

Currently, theories of financial futures hedging are based on either a portfolio-choice approach or a duration approach. This article presents an alternative: a firm-theoretic model of bank behavior with financial futures. Assuming the bank is uncertain about cash CD interest rates and the quantity of CDs it needs in the future, expressions for the optimal futures hedge are derived under constant absolute risk aversion and constant relative risk aversion. The performance of these two strategies is estimated from 1981–1983 using either the recently developed CD futures contract or the T-Bill futures contract. These results are also compared with the performance of a portfolio-choice strategy and a routine hedging strategy. The analysis indicates that the CD futures market can serve a hedging purpose that is not served by the previously established T-Bill futures market.     

Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers

This paper studies the hedging policies of oil and gas producers between 1992 and 1994. My evidence shows that the extent of hedging is related to financing costs. In particular, companies with greater financial leverage manage price risks more extensively.My evidence also shows that the likelihood of hedging is related to economies of scale in hedging costs and to the basis risk associated with hedging instruments. Larger companies and companies whose production is located primarily in regions where prices have a high correlation with the prices on which exchange-traded derivatives are based are more likely to manage risks.     

Optimal Portfolio Choices, House Risk Hedging and the Pricing of Forward House Transactions

This paper develops a utility indifference model for evaluating various prices associated with forward transactions in the housing market, based on the equivalent principle of expected wealth utility derived from the forward and spot real estate markets. Our model results show that forward transactions in the housing market are probably not due to house sellers?? and buyers?? heterogeneity, but to their demand for hedging against house price risk. When the imperfections of real estate markets and the risk preferences of market participants are taken into consideration, we are able to show that the idiosyncratic risk premium, which mainly depends on the participants?? risk preferences and the correlation between the traded asset and the real estate, is a remarkable determinant of house sellers?? and buyers?? forward reservation prices. In addition, we also find that the market clearing forward price usually will not converge toward the expected risk-neutral forward price. The sellers?? or buyers?? risk aversion degrees and market powers are also identified to play crucial roles in determining the clearing forward price.     

Hedging, Familiarity and Portfolio Choice

We exploit the restrictions of intertemporal portfolio choicein the presence of nonfinancial income risk to test hedgingusing the information contained in the actual portfolio of theinvestor. We use a unique data set of Swedish investors withinformation broken down at the investor level and into variouscomponents of investor wealth, income, and demographic characteristics.Portfolio holdings are identified at the stock level. We showthat investors do not hedge but invest in stocks closely relatedto their nonfinancial income. We explain this with familiarity,that is, the tendency to concentrate holdings in stocks to whichthe investor is geographically or professionally close or thathe has held for a long period. We show that familiarity is nota behavioral bias, but is information driven. Familiarity-basedinvestment allows investors to earn higher returns than theywould have otherwise earned if they had hedged.     

基于加权GCA模型复合天气衍生品产品基差风险对冲研究

天气衍生品产品基差风险削弱了对天气风险的对冲效果,但对冲方法的研究却较缺乏,尚未形成明确的思路。本文选取我国江西省1978—2014年的气温和降雨数据,以棉花种植业为对象,分别应用简单线性组合加权法、加权灰色关联系数法及加权灰色关联序数法,确定影响棉花生长的主要天气因素,对产品基差风险的对冲效果进行了实证比较分析。研究发现:加权灰色关联系数法优于加权灰色关联序数法,随着所购买天气衍生品种类的增加,衍生品的买方的产品基差风险逐渐降低,超过合理范围后反而造成更大的产品基差风险。因此,可依据灰色关联系数权重选择天气衍生品的种类和比例,达到降低产品基差风险目的。     

Optimal Hedging and the Partial Loss Offset Provision

In this paper, we examine how taxation affects the optimal hedging behaviour of an investor exposed to price risk under partial loss offset provision. In this regime, only part of the loss is refunded through the tax. As such, it implies a non-linearity in the taxation schedule. More specifically, we look at an individual endowed with some fixed quantity of a commodity and facing a price risk. The optimal hedging policy is derived. The comparative statics of a tightening of the PLO provision and a changing risk aversion are analysed. We show that the response of the optimal hedging policy to a change in the tax rate can be signed by a preference free or a preference related sufficient condition, involving the notions of cost-of-carry and partial risk aversion.     

Optimal Hedging and Valuation of Nontraded Assets

This paper examines a number of valuation problems faced byan expected-utility maximizing investor who, over a given timehorizon, is constrained to hold an asset which cannot be replicatedby dynamic trading and which therefore does not have a uniqueno-arbitrage price. We first derive the private valuation whichthe investor assigns to the nontraded asset in order to determinehis optimal investment in the traded assets. We thereby showthat, as part of this portfolio, the investor hedges the privatevaluation process of the nontraded asset, rather than its marketprice process. We also study the price at which the investorwould be willing to sell the nontraded asset if he were subsequentlyprohibited from trading in it, as well as the amount the investorwould be willing to pay to remove the trading restriction. Allthree values are shown to depend in an intuitive manner on theinvestor’s risk aversion, the residual risk of the nontradedasset unhedged by the traded assets, the difference betweenthe constrained holding and optimal unconstrained holding ofthe asset and the length of the time horizon over which theasset cannot be traded. JEL Classification: G11     

套期保值与金融衍生品风险管理研究

套期保值是企业经营的重要工具,能够锁定企业的经营成本,规避企业的经营风险。但是,如果套期保值运用不当,则会使企业遭受巨额的损失。本文首先对套期保值的原理及其作用进行基本的介绍,然后,结合我国央企巨亏事件,对套期保值巨亏动因进行深入的分析,以揭示套期保值的潜在风险及其认识误区。最后,对我国企业的套期保值风险控制提出若干建议。     

Optimal Hedging and Valuation of Nontraded Assets

This paper examines a number of valuation problems faced by an expected-utility-maximizing investor who, over a given time horizon, is constrained to hold an asset which cannot be replicated by dynamic trading and which therefore does not have a unique no-arbitrage price. We first derive the private valuation which the investor assigns to the nontradedasset in order to determine his optimal investment in the traded assets. We thereby show that, as part of this portfolio, the investor hedges the private valuation process of the nontraded asset, rather than its market price process. We also study the price at which the investor would be willing to sell the nontraded asset if he were subsequently prohibited from trading in it, as well as the amount the investor would be willing to pay to removethe trading restriction. All three values are shown to depend in an intuitive manner on the investor's risk aversion, the residual risk of the nontraded asset unhedged by the traded assets, the difference between the constrained holding and optimal unconstrained holding of the asset and the length of the time horizon over which the asset cannot be traded.     

An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach

This article investigates the natural hedging strategy to deal with longevity risks for life insurance companies. We propose an immunization model that incorporates a stochastic mortality dynamic to calculate the optimal life insurance–annuity product mix ratio to hedge against longevity risks. We model the dynamic of the changes in future mortality using the well‐known Lee–Carter model and discuss the model risk issue by comparing the results between the Lee–Carter and Cairns–Blake–Dowd models. On the basis of the mortality experience and insurance products in the United States, we demonstrate that the proposed model can lead to an optimal product mix and effectively reduce longevity risks for life insurance companies.     

Relative Hedging of Systematic Mortality Risk

A number of problematic issues have arisen in anticipation of the potential role of molecular tests for genetic predispositions to illness in risk assessment by insurance underwriters. We argue in this paper that the regrettable history and current risks of genetic discrimination warrant a presumption that genetic predisposition status should not be used in any nonmedical contexts, unless compelling evidence can demonstrate that serious harm will result to third-party interests without such use. We argue that insurers should not be able to initiate testing for genetic predisposition. We also argue that there are many reasons to doubt whether patients’ test results will result in such serious adverse selection as to cause substantial harm to insurance markets, except possibly at higher policy amounts in life or disability income insurance. We conclude that the burden of proof must be on insurers to demonstrate necessity of use in specific cases in which test availability shows high probability of imminent, serious harm to insurance markets.     

Hedging and Coordinated Risk Management: Evidence from Thrift Conversions

We provide an explanation for hedging as a means of allocating rather than reducing risk. We argue that when increases in total risk are costly, firms optimally allocate risk by reducing (increasing) exposure to risks that provide zero (positive) economic rents. Our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion, consistent with their increased abilities and incentives for risk taking. They achieve this increase by hedging interest-rate risk and increasing credit risk. We provide some evidence that risk-management activities are related to growth capacity and management compensation structure attained at conversion.