Dynamic Hedging of Real Wealth Risk

Stefan Schubert and Udo Broll

No 01/05, Dresden Discussion Paper Series in Economics from Technische Universität Dresden, Faculty of Business and Economics, Department of Economics

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.

Keywords: wealth; asset price; dynamic hedging; optimum consumption (search for similar items in EconPapers)
JEL-codes: F21 F31 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuddps:0105

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