Economic Hedging Portfolios

R.W.J. van den Goorbergh, F.A. de Roon, B.J.M. Werker

Research output: Working paperDiscussion paperOther research output

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Abstract

In this paper we study portfolios that investors hold to hedge economic risks.Using a model of state-dependent utility, we show that agents economic hedging portfolios can be obtained by an intuitively appealing, risk aversion-weighted approximate replication of the economic risk variables using the investment opportunity set, as opposed to the unweighted hedging demand obtained in the traditional mean-variance framework.We find that agents across a broad range of levels of risk aversion are willing to pay significant compensations for hedges against inflation risk, real interest-rate risk, and dividend-yield risk.Furthermore, our results show that all economic risk variables we consider require significant, often risk aversion-dependent hedging adjustments with respect to one or more securities.Moreover, we analyze investors speculative positions and find that hedges against economic risks may potentially explain the anomalies found in stock markets as well as the term and default premiums in bond markets.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages31
Volume2003-102
Publication statusPublished - 2003

Publication series

NameCentER Discussion Paper
Volume2003-102

Fingerprint

Economic risk
Hedging
Economics
Hedge
Risk aversion
Investors
Investment opportunity set
Replication
Interest rate risk
Stock market
Anomaly
Dividend yield
Inflation risk
Mean-variance
Bond market
Premium
State-dependent utility

Keywords

  • hedging
  • risk
  • investment

Cite this

van den Goorbergh, R. W. J., de Roon, F. A., & Werker, B. J. M. (2003). Economic Hedging Portfolios. (CentER Discussion Paper; Vol. 2003-102). Tilburg: Finance.
van den Goorbergh, R.W.J. ; de Roon, F.A. ; Werker, B.J.M. / Economic Hedging Portfolios. Tilburg : Finance, 2003. (CentER Discussion Paper).
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van den Goorbergh, RWJ, de Roon, FA & Werker, BJM 2003 'Economic Hedging Portfolios' CentER Discussion Paper, vol. 2003-102, Finance, Tilburg.

Economic Hedging Portfolios. / van den Goorbergh, R.W.J.; de Roon, F.A.; Werker, B.J.M.

Tilburg : Finance, 2003. (CentER Discussion Paper; Vol. 2003-102).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

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AU - van den Goorbergh, R.W.J.

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AU - Werker, B.J.M.

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N2 - In this paper we study portfolios that investors hold to hedge economic risks.Using a model of state-dependent utility, we show that agents economic hedging portfolios can be obtained by an intuitively appealing, risk aversion-weighted approximate replication of the economic risk variables using the investment opportunity set, as opposed to the unweighted hedging demand obtained in the traditional mean-variance framework.We find that agents across a broad range of levels of risk aversion are willing to pay significant compensations for hedges against inflation risk, real interest-rate risk, and dividend-yield risk.Furthermore, our results show that all economic risk variables we consider require significant, often risk aversion-dependent hedging adjustments with respect to one or more securities.Moreover, we analyze investors speculative positions and find that hedges against economic risks may potentially explain the anomalies found in stock markets as well as the term and default premiums in bond markets.

AB - In this paper we study portfolios that investors hold to hedge economic risks.Using a model of state-dependent utility, we show that agents economic hedging portfolios can be obtained by an intuitively appealing, risk aversion-weighted approximate replication of the economic risk variables using the investment opportunity set, as opposed to the unweighted hedging demand obtained in the traditional mean-variance framework.We find that agents across a broad range of levels of risk aversion are willing to pay significant compensations for hedges against inflation risk, real interest-rate risk, and dividend-yield risk.Furthermore, our results show that all economic risk variables we consider require significant, often risk aversion-dependent hedging adjustments with respect to one or more securities.Moreover, we analyze investors speculative positions and find that hedges against economic risks may potentially explain the anomalies found in stock markets as well as the term and default premiums in bond markets.

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van den Goorbergh RWJ, de Roon FA, Werker BJM. Economic Hedging Portfolios. Tilburg: Finance. 2003. (CentER Discussion Paper).