The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Hedging

  • Gregory Connor
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1174

Abstract

Hedging is defined with a state-space model of risky outcomes. Full and partial hedging are compared, and the feasible set of hedging positions related to the available collection of traded assets. Three types of counter-parties for hedging trades are distinguished. The risk premium for a hedging asset is defined, and its relationship to economy-wide risk factors explained. The case of mean-variance preferences provides a useful formula for the optimal hedge position. Corporations undertake many hedging transactions, even though the shareholders of the corporation do not typically benefit from any risk reduction. Some explanations of corporate hedging are set out.

Keywords

Adverse selection Asset pricing Bankruptcy Bid ask spread Brownian motion Corporate hedging Differential information Futures markets Hedge portfolio Hedging Keynes, J. M. Mean-variance preference model Moral hazard Normal backwardation Portfolio insurance Progressive taxation Risk aversion Risk premium Speculation State space models Taxation of corporate profits 

JEL Classifications

G1 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Gregory Connor
    • 1
  1. 1.