Consumption, Inflation Risk and Dynamic Hedging

Contemporary Economics, Vol. 9, No. 2, pp. 171-180, 2015

10 Pages Posted: 5 Sep 2015

See all articles by Stefan Franz Schubert

Stefan Franz Schubert

Free University of Bozen-Bolzano

Udo Broll

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: June 30, 2015

Abstract

Our study examines the behavior of a risk-averse investor who faces two sources of uncertainty: a random asset price and inflation risk. Both sources of uncertainty make it difficult to stabilize consumption over time. However, investors can enter risk-sharing markets, such as futures markets, to manage these risks. We develop a dynamic risk management model. Optimal consumption and risk management strategies are derived. It is shown that dynamic hedging increases an investor’s welfare in terms of the expected inter-temporal utility of consumption.

Keywords: Dynamic hedging, asset price risk, inflation risk, real wealth, consumption

JEL Classification: D21, D24

Suggested Citation

Schubert, Stefan Franz and Broll, Udo, Consumption, Inflation Risk and Dynamic Hedging (June 30, 2015). Contemporary Economics, Vol. 9, No. 2, pp. 171-180, 2015 , Available at SSRN: https://ssrn.com/abstract=2656066

Stefan Franz Schubert (Contact Author)

Free University of Bozen-Bolzano ( email )

Via Sernesi 1
39100 Bozen-Bolzano (BZ)
Italy
+390471013495 (Phone)

Udo Broll

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

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