Consumption, Inflation Risk and Dynamic Hedging
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Our study examines the behavior of a risk-averse investor who faces two sources of uncertainty: a random asset price and inflation risk. Both sources of uncertainty make it difficult to stabilize consumption over time. However, investors can enter risk-sharing markets, such as futures markets, to manage these risks. We develop a dynamic risk management model. Optimal consumption and risk management strategies are derived. It is shown that dynamic hedging increases an investor’s welfare in terms of the expected inter-temporal utility of consumption. © 2015, Wyzsza Szkola Finansow i Zarzadzania w Warszawie. All rights reserved.