This paper examines whether parimutuels can hedge risk-averse people against catastrophic losses. Two optimal stake choice models are constructed. In the first model, where stakes of other players are exogenous, the dynamic optimal hedge is obtained. In the second model, the equilibrium of stake is derived by maximizing the representative agent’s expected utility. Given no transaction cost, par...

This paper examines optimal compensation contracts when executives can hedge their personal portfolios. In a simple principal-agent framework, I predict that the Chief Executive Officer’s (CEO’s) pay-performance sensitivity decreases with the executivehedging cost. Empirically, I find evidence supporting the model’s prediction. Providing further support for the theory, I show that shareholders ...

The returns to hedge funds and other alternative investments are often highly serially correlated. In this paper, we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure and smoothed returns. We propose an econometric model of return smoothing and develop estimators for the smoothing profile as well as a smoothing-adjusted Sharpe r...

The main contribution of this article is to present hard evidence on hedging strategies and relate it to behavioural and agency problems resulting from speculation with derivatives. We focus on the case of Aracruz Celulose. We show how the real hedge position of Aracruz – that lost US$2.1 billion in currency derivatives – deviated from its optimal hedge as the result of speculation with Over-th...

In this paper, we propose a novel fuzzy logic controller, called linguistic hedge fuzzy logic controller, to simplify the membership function constructions and the rule developments. The design methodology of linguistic hedge fuzzy logic controller is a hybrid model based on the concepts of the linguistic hedges and the genetic algorithms. The linguistic hedge operators are used to adjust the s...

The incentive on an electricity generating firm to exercise market power depends strongly on the volume the firm has pre-sold in the forward or hedge markets. Therefore, in order to forecast the effect of mergers and other market developments on market power outcomes, it is essential to model the hedging decisions of dominant generating firms. This paper shows that a dominant firm’s profit-maxi...

Motivated by a production planning problem in an actual global manufacturing network, we examine the impact of exchange-rate uncertainty ... namely the volatility in an& correlations among exchange rates ... on the choice of various optimal production policies and the conditions which lead to them. A two-stage stochastic program with recourse is developed that provides opportunities to hedge fi...

Regression and duratio n are com peting hed ging models for reducing the risk of a debt position. This paper compa res these mode ls to determ ine if one method provides consistently superior hedging results. Both perfect forecast (in-sample) and historical (out-ofsample) hedge ratios a re emplo yed to hedge the long-term Bellwether bond and the two-year T-note. The regression procedure provide...

In [1] Zawadoski introduces a banking network model in which the asset and counter-party risks are treated separately and the banks hedge their assets risks by appropriate OTC contracts. In his model, each bank has only two counter-party neighbors, a bank fails due to the counter-party risk only if at least one of its two neighbors default, and such a counter-party risk is a low probability eve...

We find that past stock market variance forecasts excess stock market returns and that its predictive ability is greatly enhanced if the consumption-wealth ratio is also included in the forecasting equation. While the risk-return tradeoff is found negative if we use the latter as the instrumental variable for the conditional moments, the former suggests a positive one. We argue that the consump...