Microeconomic Risk Management and Macroeconomic Stability (eBook)

Contents 7
List of Figures 10
Part I Preliminary Explorations 13
1 Introduction 14
1.1 Literature Review and Motivation 14
1.1.1 Why Should Firms Hedge? 15
1.1.2 How Much Do Firms Hedge? 18
1.2 Outline 20
Part II A Micro View: Optimal Risk Management 23
2 Backwardation and Optimal Hedging Demand in an Expected Utility Hedging Model 24
2.1 Introduction 24
2.2 The Expected Utility Hedging Model 26
2.2.1 Optimal Long Hedging 26
2.2.2 Hedging Costs and Optimal Hedging 29
2.3 Empirical Investigation 30
2.3.1 Data and Summary Statistics 30
2.3.2 Vector Autoregression and Vector Error Correction Analysis 33
2.4 Discussion 39
3 Mean-Variance Versus Minimum-Variance Hedging 40
3.1 Introduction 40
3.2 The Mean-Variance Approach to Hedging 41
3.2.1 The Model 41
3.2.2 Optimal Hedging 42
3.2.3 Pure Hedging and Speculative Demand 47
3.2.4 The Value of the Futures Market 50
3.3 Minimum-Variance Hedging and Hedging Effectiveness 51
3.3.1 Deriving the Pure Hedge 51
3.3.2 Hedging Effectiveness and Correlation 53
3.3.3 Optimal Hedge Ratios by Linear Regression 54
3.4 Discussion 56
Part III A Macro View: Economic Stability 58
4 Corporate Risk Management in Balance-Sheet Triggered Currency Crises 59
4.1 Introduction 59
4.2 The Basic Mundell–Fleming–Tobin Model 61
4.2.1 The Goods Market 61
4.2.2 The Financial Markets 64
4.2.3 The Multiple Equilibria MFT Model 65
4.3 Linear Hedging and Speculation in the MFT Model 66
4.3.1 The Hedging Methodology and the Investment Function 66
4.3.2 Speculation and the Investment Function 70
4.3.3 Simulation of the Basic Model 71
4.3.4 Simulation of Hedging Activity 72
4.3.5 Simulation of Speculation 73
4.3.6 The Role of Trading Costs: Forwards Versus Futures 74
4.4 A Nonlinear Hedging Strategy Using Options 81
4.4.1 Options Hedging and Investment 81
4.4.2 Simulation of Options Hedging 84
4.4.3 Linear Versus Nonlinear Hedging Strategies 86
4.5 Economic Implications 89
4.5.1 Corporate Hedging and Economic Stability 89
4.5.2 Capital Flight and Private Asset Allocation 91
4.6 Discussion 94
5 Arbitrage Pressure, Positive Feedback Speculation, Selective Hedging, and Economic Stability: An Empirical Analysis and Catastrophe Modelling 95
5.1 Introduction 95
5.2 Arbitrage Pressure and Noise Trading 97
5.2.1 Arbitrage with Transaction Costs 97
5.2.2 Arbitrage with Holding Costs 99
5.2.3 Noise, Positive Feedback Trading, and Herding 100
5.3 Vector Autoregression Analysis of Futures Trading Activity 102
5.3.1 Data 102
5.3.2 Speculation Versus Hedging 103
5.3.3 Long Versus Short Speculation 105
5.4 Logistic Smooth Transition Regression Analysis of Long Speculation 106
5.4.1 The LSTR Model 110
5.4.2 Testing Linearity Against LSTR 110
5.4.3 Estimation Results 111
5.4.3.1 AUD – Speculation Dynamics 111
5.4.3.2 CHF – Speculation Dynamics 114
5.4.3.3 EUR – Speculation Dynamics 115
5.4.3.4 JPY – Speculation Dynamics 117
5.4.3.5 MXP – Speculation Dynamics 119
5.4.4 Misspecification Tests 120
5.5 A Catastrophe Theory Approach 121
5.5.1 The Cusp Catastrophe Model and Underlying Hypotheses 123
5.5.2 The Chain of Events 124
5.6 Discussion 126
6 Conclusions 128
A A Geometric Approach to the Hedgers' Surplus 131
B Stability Analysis 133
C The Computation of the Catastrophe Surface 137
Bibliography 139