Narrow Results

National and international investors are exposed to risk, stemming from volatile asset prices and inflation uncertainty. However investors can enter futures markets to hedge against these risks. The paper develops a dynamic hedging model, where the evolution of asset price, price level and futures price and hence real wealth is stochastic. For a risk averse investor, optimal dynamic consumption and hedging strategy are derived and discussed.

Various empirical studies have been conducted. However, these studies fail to examine the asymmetric effect of income and price across different quantiles of consumption in the emerging 7 countries. This study extends the existing literature using a novel approach called the quantile ARDL model along with the standard nonlinear ARDL model. Findings based on the nonlinear ARDL model indicate that positive shocks in income positively and significantly affect consumption in the short- and long-run. On the other hand, negative shocks in income do not significantly affect consumption which, therefore, suggests an asymmetric effect of income on consumption. In addition, the quantile ARDL estimates indicate that income positively affects consumption across all quantiles of the consumption except the 95th quantile. Moreover, the quantile ARDL estimates indicate that price variations negatively affect consumption across all emerging 7 countries. These estimates suggest that devising policies without considering the asymmetric effect may lead to unfavorable consequences.

This paper computes the welfare gains from optimal hedging with futures contracts for an oil-exporting country. Unlike previous studies, this paper derives the welfare gains under a more realistic futures hedging model. This is accomplished by considering basis risk and by relaxing the full-hedging assumption. Furthermore, this is the first paper to derive the welfare gains under optimal hedging strategies. We also incorporate the empirical relationship between spot and futures prices within our models, rather than the theoretical relationship which most studies employ. The models were developed under a dynamic stochastic optimization framework and the optimal consumption and value functions were found using the method of Endogenous Gridpoints. The results showed that the choice of the optimal hedging strategy employed led to a slight improvement in the country’s welfare gains relative to full hedging. We also found that the strategies with the highest welfare gains were the most effective at volatility reduction. Finally, this paper provides compelling evidence for the use of optimal macro futures hedging as an effective risk management tool for oil-exporting developing countries.

This paper deals with the problem of optimal consumption and portfolio for a generalized Black and Scholes market where the volatility is driven by a standard Brownian motion and by a fractional Brownian motion in the same time.

We consider the optimal investment and consumption policy for a constant absolute risk averse investor who faces fixed and/or proportional transaction costs when trading a stock and maximizes his expected utility from intertemporal consumption. We show that the Hamilton-Jacobi-Bellman PDE with free boundaries can be reduced to an ODE, which greatly simplifies the problem. Using the stochastic impulse and singular control techniques, we then derive the optimal investment and consumption policy. In particular, when there are both fixed and proportional costs, it is shown that the optimal stock investment policy is to keep the dollar amount invested in the stock between two constant levels and upon reaching these two thresholds, the investor jumps to the corresponding optimal target level.