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Would Ambiguity Averse Investors Hedge Risk in Equity Markets?
| Content Provider | Scilit |
|---|---|
| Author | Gertsman, Gleb Frehen, Rik Werker, Bas J. M. |
| Copyright Year | 2019 |
| Description | Journal: SSRN Electronic Journal This paper studies the conjecture that investors prefer derivative markets over the equity market when hedging risks. An investor who wants to hedge, say inflation or crash risk, faces substantially more beta uncertainty in the stock market than in the derivatives market. We show theoretically, that an investor with smooth ambiguity aversion preferences avoids a hedge portfolio consisting of stocks, which is typically subject to large beta uncertainty. The ambiguity averse investor prefers to hedge using derivatives (TIPS and options) which are not subject to beta uncertainty. More specifically, we show that equilibrium risk premiums for assets with large beta uncertainty (long-short portfolio of stocks) decline once derivatives with less beta uncertainty (TIPS and options) are introduced. In line with this theory, we find that the inflation risk premium in the equity market disappears after TIPS were introduced. |
| Related Links | https://pure.uvt.nl/ws/files/32384769/SSRN_id3497644.pdf https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=3497644 |
| ISSN | 10914358 |
| e-ISSN | 15565068 |
| DOI | 10.2139/ssrn.3497644 |
| Journal | SSRN Electronic Journal |
| Language | English |
| Publisher | Elsevier BV |
| Publisher Date | 2019-11-01 |
| Access Restriction | Open |
| Subject Keyword | Journal: SSRN Electronic Journal Hedging Uncertainty Ambiguity Aversion Inflation Risk |
| Content Type | Text |
| Resource Type | Article |
| Subject | Public Health, Environmental and Occupational Health Psychiatry and Mental Health |
