Optimal Hedging under Intertemporally Dependent Preferences
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- Author(s): ERIC BRIYS, MICHEL CROUHY, HARRIS SCHLESINGER
- Published: Apr 30, 2012
- Pages: 1315-1324
- DOI: 10.1111/j.1540-6261.1990.tb02440.x
This paper examines optimal hedging behavior in a market where preferences for current consumption are partly determined by the consumer's past consumption history. The model considers an individual exposed to price risk, who allocates wealth between consumption and futures contracts over a (continuous‐time) finite planning horizon. The speculative component of the hedge ratio is shown to be smaller and the consumption path smoother than in models where preferences are separable over time. Some comparative‐static properties of the hedge ratio are also examined.