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From 1996 to 2016, Brazil faced great fluctuations in both its exchange and interest rates and simultaneously a huge growth of its agriculture has taken place. Examining the literature that deals with the relationships among these three variables (interest rate, exchange rate and agriculture GDP) we verified that monetary and exchange shocks can affect directly and/or indirectly (through relative prices) the agriculture GDP. However, these effects can be coincident or contrary between them. What actually happened in Brazil from 1996 to 2016? This article aimed to access the direct and indirect effects of monetary and exchange rate shocks on Brazil's agriculture GDP taking into consideration years ranging from 1996 thru 2016. Using quarterly data for the 1996-2016 period, autoregressive vector models (VAR and VEC) were estimated. The exchange rate and monetary shocks were analyzed considering three different interest rate types, namely: the current Brazil's Federal Funds Rate (Nominal SELIC rate), real interest rate of agricultural loans, and ex-ante real interest rate. We also analyzed the effect of the exchange rate separately on prices paid and on prices received by the agriculture (both make up the relative prices of agriculture) using an ARDL (Distributed Lag Self-Regressive Model) model with monthly data. Our econometric results revealed that both direct and indirect effects of monetary shocks were negative on the agriculture growth while the direct and indirect effects of exchange rate shocks were mutually contradictory themselves on the Brazil's agriculture GDP. Because of the technical changes that have taken place during the 2000s and the 2010s, which turned some of the most representative crops more dependent on imported inputs, and the hedging behavior that the firms have adopted during the first two decades of the [21.sup.st] century, which protects them from exchange oscillations, the agricultural sector lost sensitivity to the exchange rate variations in some extent. Regarding policy implications, it could be said that monetary policy can be efficient in the promotion of the agricultural sector, and, in fact, Brazilian government has been doing such through the rural credit subsidized interest rate. Exchange policy, on the other hand, proved to be inefficient in favoring the agriculture, or, in other words, the government can freely exercise exchange policy without regards to harm the agricultural sector. JEL classifications: C32, C22, E23, E43, F43, F62, Q11, Q14, Q17 Keywords: Agriculture; Exchange rate shocks; Monetary Shocks; VAR; ARDL; Brazil; Contact author's email address: pedromachado.an@gmail.com, INTRODUCTION Brazil's macroeconomic environment has intensely changed since the implementation of the Real Plan on July [1.sup.st], 1994. The following twenty-seven years have been marked by huge Exchange rate and [...]

Financial inclusion is vital in economic development as it empowers families and communities to meet basic needs, such as nutritious food, clean water, housing, education, and healthcare. Financial inclusion is also a tool for hedging against extreme weather events, disasters, and health crises such as the COVID-19 pandemic. Moreover, access to financial services has the potential to alleviate poverty, reduce income inequality, and stimulate economic growth and development. However, there is limited literature regarding the impact of financial inclusion at the household level. According to the latest World Bank Global Findex, the number of financially included adults has risen substantially in Tanzania due to the introduction of mobile money and baking financial inclusion. Based on Tanzania World Bank's Global Findex micro-data set for 2011, 2014, and 2017 surveys, this study uses the ordered probit regression model with endogenous treatment assignment to evaluate factors influencing financial inclusion and estimate the impact of financial inclusion on income in Tanzania. The available literature guided us in selecting the independent variables to include in the financial inclusion and impact models. The applied model allows for correcting for self-selection bias and endogenous effects associated with financial inclusion and income. Self-selection bias can occur when individuals choose whether to participate in a program based on their socioeconomic and demographic circumstances. Due to self-selection, participants often differ from nonparticipants in ways significant to the research, leading to a biased sample, which affects the generalizability of the research results. The results show that formal education and lack of money are the most crucial factor influencing financial inclusion and exclusion. Moving from financial exclusion to inclusion increased the probability of being in the higher income brackets. Personal finance education programs geared towards the most vulnerable groups would improve financial inclusion and income in Tanzania. Results from this study indicate that financial inclusion has a positive impact on income, and thus, it is crucial to enhance the scope coverage via more extensive and swift channels, such as mobile money and baking. Enhanced financial inclusion in Tanzania will lead to higher and quicker integration of the excluded community members into formal financial systems, thereby maximizing the effects of financial inclusion on the poor and the country's economic growth. JEL classifications: G21, O16 Keywords: Barrier, inclusion, income, finance, ordered logit, Tanzania Contact author's email address: aloyce_kaliba@subr.edu, INTRODUCTION AND CONTEXT As defined by the World Bank (2018), financial inclusion allows individuals and businesses to access valuable and affordable financial products and services that meet their needs. Therefore, [...]

Financial inclusion is vital in economic development as it empowers families and communities to meet basic needs, such as nutritious food, clean water, housing, education, and healthcare. Financial inclusion is also a tool for hedging against extreme weather events, disasters, and health crises such as the COVID-19 pandemic. Moreover, access to financial services has the potential to alleviate poverty, reduce income inequality, and stimulate economic growth and development. However, there is limited literature regarding the impact of financial inclusion at the household level. According to the latest World Bank Global Findex, the number of financially included adults has risen substantially in Tanzania due to the introduction of mobile money and baking financial inclusion. Based on Tanzania World Bank's Global Findex micro-data set for 2011, 2014, and 2017 surveys, this study uses the ordered probit regression model with endogenous treatment assignment to evaluate factors influencing financial inclusion and estimate the impact of financial inclusion on income in Tanzania. The available literature guided us in selecting the independent variables to include in the financial inclusion and impact models. The applied model allows for correcting for self-selection bias and endogenous effects associated with financial inclusion and income. Self-selection bias can occur when individuals choose whether to participate in a program based on their socioeconomic and demographic circumstances. Due to self-selection, participants often differ from nonparticipants in ways significant to the research, leading to a biased sample, which affects the generalizability of the research results. The results show that formal education and lack of money are the most crucial factor influencing financial inclusion and exclusion. Moving from financial exclusion to inclusion increased the probability of being in the higher income brackets. Personal finance education programs geared towards the most vulnerable groups would improve financial inclusion and income in Tanzania. Results from this study indicate that financial inclusion has a positive impact on income, and thus, it is crucial to enhance the scope coverage via more extensive and swift channels, such as mobile money and baking. Enhanced financial inclusion in Tanzania will lead to higher and quicker integration of the excluded community members into formal financial systems, thereby maximizing the effects of financial inclusion on the poor and the country's economic growth. JEL classifications: G21, O16 Keywords: Barrier, inclusion, income, finance, ordered logit, Tanzania, INTRODUCTION AND CONTEXT As defined by the World Bank (2018), financial inclusion allows individuals and businesses to access valuable and affordable financial products and services that meet their needs. Therefore, [...]

Most theories of decision making are consequentialist. They presume that people evaluate prospects on the basis of potential outcomes. However, people may often conceptualize prospects in part nonconsequentially. Consider someone evaluating a new, 'focal' prospect given an unresolved 'background' position to which that person is already exposed. If the two are positively correlated, the individual may conceptualize the focal prospect as a bet 'with' the individual's background position; if they are negatively correlated, the individual may conceptualize the focal prospect as a bet 'against' the individual's background position. Because people like to be consistent, this nonconsequentialist conceptualization may induce a taste for betting 'with' the background position. Such bets constitute risk-seeking doubling down, not risk-averse hedging. Indeed, we observe that relative to corresponding background-less choices, participants with unresolved background positions are relatively risk-seeking, favoring positively rather than negatively correlated focal prospects. They also sometimes show a simultaneous taste for both doubling down and hedging. History: Accepted by Manel Baucells, decision analysis. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2017.2918. Keywords: decision making * risk * uncertainty * hedging * consequentialist, 1. Introduction In making decisions under uncertainty, people must consider how their current options interact with unresolved uncertainties to which they are already exposed. Suppose an individual works in the [...]

Abstract. Adverse commodity prices can cause significant negative cash flows and expose firms that deal in commodities to financial distress. In this paper we consider the dynamic risk management problem [...]

Subsequent to the floating of the US dollar in 1973, liberalization of capital flows and the associated exponential growth of cross-border financial transactions during the last three decades, important volatility and uncertainty has been seen in exchange rates (Arize, 1998). Academicians, policy makers, researchers and economists have always raised eyebrows with regards to the potential impact of exchange rate volatility on trade. Taking into account the foregoing, recent volatility in world known currencies and given that African countries rely heavily on manufacturing trade for their survival, this paper analyses the impact of exchange rate volatility on manufacturing trade in a sample of 18i African countries spanning the period 1995-2012 using an import-export model and dynamic panel data econometrics. As measures of exchange rate volatility, the Z score and EGARCH as employed. In a dynamic setting, contrary to what static results suggest, random coefficient estimates reveal that both REER and its volatility are statistically significant in explaining real manufacturing imports and exports using both measures of exchange rate volatility. However, foreign income, contrary to the law of income elasticity of demand is inelastic in explaining the exports. When VaR estimation is employed, however, only when EGARCH is employed, does exchange rate volatility adversely affect real manufacturing imports and exports. The negative impact of exchange rate volatility on manufacturing exports means that the governments of the African states should look for policies to stabilize their external trade position. As the results, the African economies should seek the help of developed and emerging nations in developing their financial markets, more explicitly well-developed hedging instruments and markets. In the same vein, governments should come up with the necessary policies to promote the introduction of institutions to provide such services. The results of the study also have important insights to offer in terms of government macroeconomic policies to stabilise external trade in the African countries such as diversification of markets and payment alternatives and on a regional scene to start thinking about a regional currency pegged to a major world currency. JEL Classifications: C32, F14, F31, F40, F41 Keywords: Exchange Rate Volatility, Trade, VAR, EGARCH, INTRODUCTION Since 1973, several theoretical and empirical studies have been carried out to study the impact of exchange rate volatility on trade of both goods and services. Following the pioneering [...]

We analyze the value created by a dynamic integrated risk management strategy involving liquidity management, derivatives hedging, and operating flexibility, in the presence of several frictions. We show that liquidity serves a critical and distinct role in risk management, justifying high levels of cash. We find that the marginal value associated with derivatives hedging is likely to be low, though we explain why some empirical studies find a higher value. We explore the complex interactions between operating flexibility and financial risk management, finding that substitution effects are nonmonotonic and are affected by operating leverage, the nature of operating flexibility, and the effectiveness of the hedging instrument. Key words: finance; corporate finance; risk management; hedging; operating flexibility, cash management History: Received June 11, 2012; accepted March 19, 2013, by Jerome Detemple, finance. Published online in Articles in Advance September 3, 2013., 1. Introduction Risk management has become a critical dimension of corporate financial policy, particularly in light of recent global financial and economic crises. The corporate risk management literature focuses on [...]

We perform a comprehensive evaluation of the benefits of emerging market equities by extending previous research in four fundamental ways. The contribution of this study is that it: 1) evaluates a more complete sample; 2) examines performance measures that account for asymmetric return distributions; 3) separates emerging markets by region; and 4) considers the influence that the market environment has on the benefits of emerging market investments. Our results suggest that previous research has understated the benefits associated with investing in emerging markets. We find that broad emerging market indices have relatively low downside risk, which results in Sortino ratios that are approximately twice that offered by developed markets. Furthermore, we find that Latin American countries are particularly beneficial in hedging against adverse conditions in U.S. financial markets. Overall, our findings indicate that emerging markets allow investors to achieve lower risk, higher returns, and expanded risk/return possibilities, especially during periods when developed world investors need diversification the most., How Large Are the Benefits of Emerging Market Equities? Previous research documents a substantial benefit associated with an investment allocation that includes international equities (e.g., Solnik, 1974). More recent research, [...]

This paper analyzes the interactions between competitive (wholesale) spot, retail, and forward markets and vertical integration in electricity markets. We develop an equilibrium model with producers, retailers, and traders to study and quantify the impact of forward markets and vertical integration on prices, risk premia, and retail market shares. We point out that forward hedging and vertical integration are two separate mechanisms for demand and spot price risk diversification that both reduce the retail price and increase retail market shares. We show that they differ in their impact on prices and firms' utility because of the asymmetry between production and retail segments. Vertical integration restores the symmetry between producers' and retailers' exposure to demand risk, whereas linear forward contracts do not. Vertical integration is superior to forward hedging when retailers are highly risk averse. We illustrate our analysis with data from the French electricity market. Key words: corporate finance; industries; electric-electronic; financial institutions; markets; asset pricing History: Received March 24, 2009; accepted March 3, 2011, by Wei Xiong, finance. Published online in Articles in Advance June 20, 2011., 1. Introduction Corporate risk management has long been viewed as a prominent motive for vertical integration. In particular, managers have long perceived the supply and/or demand insurance rationale for vertical [...]

Byline: Mariana Blanco (1), Dirk Engelmann (2,3,4), Alexander K. Koch (5), Hans-Theo Normann (6,7) Keywords: Belief elicitation; Hedging; Experimental economics; Experimental methodology; C72; C90 Abstract: Belief-elicitation experiments usually reward accuracy of stated beliefs in addition to payments for other decisions. But this allows risk-averse subjects to hedge with their stated beliefs against adverse outcomes of the other decisions. So can we trust the existing belief-elicitation results? And can we avoid potential hedging confounds? We propose an experimental design that theoretically eliminates hedging opportunities. Using this design, we test for the empirical relevance of hedging effects in the lab. Our results suggest that hedging confounds are not a major problem unless hedging opportunities are very prominent. If hedging opportunities are transparent, and incentives to hedge are strong, many subjects do spot hedging opportunities and respond to them. The bias can go beyond players actually hedging themselves, because some expect others to hedge and best respond to this. Author Affiliation: (1) Economics Department, Universidad del Rosario, Calle 14 No. 4-80, Bogota, Colombia (2) Department of Economics, University of Mannheim, L7, 3-5, 68131, Mannheim, Germany (3) Centre for Experimental Economics, University of Copenhagen, Copenhagen, Denmark (4) Economics Institute of the Academy of Sciences of the Czech Republic, Prague, Czech Republic (5) School of Economics and Management, Aarhus University, Building 1322, 8000, Aarhus C, Denmark (6) Dusseldorf Institute for Competition Economics (DICE), Dusseldorf University, 40225, Dusseldorf, Germany (7) Max-Planck Institute for Research on Collective Goods, Bonn, Germany Article History: Registration Date: 01/07/2010 Received Date: 22/05/2008 Accepted Date: 01/07/2010 Online Date: 22/07/2010 Article note: Electronic Supplementary Material The online version of this article (doi: 10.1007/s10683-010-9249-1) contains supplementary material, which is available to authorized users.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2010.05.002 Byline: David L. Hummels (a), Georg Schaur (b) Keywords: Hedging; Volatility; Adjustment costs; Air transport; Real option Abstract: Purchasing goods from distant locations introduces a significant lag between when a product is shipped and when it arrives. These transit lags are trade barriers for firms facing volatile demand, who must place orders before knowing the resolution of demand uncertainty. We provide a model in which airplanes bring producers and consumers together in time. Fast transport allows firms to respond quickly to favorable demand realizations and to limit the risk of unprofitably large quantities during low demand periods. The model predicts that the likelihood and extent to which firms employ air shipments is increasing in the volatility of demand they face, decreasing in the air premium they must pay, and increasing in the contemporaneous realization of demand. We confirm all three conjectures using detailed US import data. Fast transport thus provides firms with a real option to smooth demand volatility on international markets, and we provide simple calculations of that option value. This enables us to identify how the option value relates to goods characteristics, and to changes in air transport premia associated with technological and policy change including the introduction of jet engines, and liberalization of trade in air services. Author Affiliation: (a) NBER and Purdue University, West Lafayette, USA (b) The University of Tennessee, Knoxville, USA Article History: Received 22 September 2009; Revised 14 May 2010; Accepted 26 May 2010 Article Note: (footnote) [star] We thank Editor Bruce Blonigen and two anonymous referees for many helpful comments and suggestions. We thank Jason Abrevaya, Jack Barron, Donald Davis, Kanda Naknoi, Bill Neilson, Chong Xiang, Adina Ardelean, Vova Lugovskyy, participants at the EIIT 2006, Midwest Meetings Fall 2007, 10th Annual GTAP Conference and seminar participants at Purdue University, The University of Tennessee, UC Santa Cruz, Kansas State and Kent State. Any remaining errors are our own.

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1468-5957.2009.02170.x Byline: Richard D. F. Harris (1), Jian Shen (1), Evarist Stoja (1) Keywords: minimum-variance hedge ratio; realized beta; multivariate conditional volatility models; bias correction Abstract: Abstract: In this paper, we compare the estimated minimum-variance hedge ratios from a range of conditional hedging models with the 'realized' minimum variance hedge ratio constructed using intraday data. We show that the reduction in conditionally hedged portfolio variance falls far short of the ex post maximal reduction in variance obtained using the realized minimum variance hedge ratio. While this is partly due to systematic bias, correcting for this bias does little to improve hedging effectiveness. The poor performance of conditional hedging models is therefore more likely to be attributable to the unpredictability of the integrated hedge ratio. Author Affiliation: (1)The first and second authors are from the Xfi Centre for Finance and Investment, University of Exeter. The third author is from the School of Economics, Finance and Management, University of Bristol. Parts of this paper were written while Evarist Stoja was a visiting researcher at Georgetown University. He gratefully acknowledges financial support from Queen's University. The authors would like to thank the editor and the anonymous referee for suggestions that have undoubtedly helped to improve the paper. They would also like to thank Martin Evans, Tim Bollerslev and seminar participants at the Oxford-Man Financial Econometrics and Vast Data Conference, the University of Bath, the University of Bristol, Queen's University of Belfast, the University of Reading and the Baptist University of Hong Kong for useful comments and suggestions. Article History: (Paper received July 2008, revised version accepted July 2009) Article note: (*) Address for correspondence: Richard D. F. Harris, Xfi Centre for Finance and Investment, University of Exeter, Exeter EX4 4PU, UK., e-mail: R.D.F.Harris@exeter.ac.uk

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jdeveco.2008.09.010 Byline: Brian Baisa (a), Lucas W. Davis (a), Stephen W. Salant (a)(b), William Wilcox (a) Keywords: Water supply uncertainty; Water storage; Distributional inefficiency Abstract: Throughout the developing world, many water distribution systems are unreliable. As a result, it becomes necessary for each household to store its own water as a hedge against this uncertainty. Since arrivals of water are not synchronized across households, serious distributional inefficiencies arise. We develop a model describing the optimal intertemporal depletion of each household's private water storage if it is uncertain when water will next arrive to replenish supplies. The model is calibrated using survey data from Mexico City, a city where many households store water in sealed rooftop tanks known as tinacos. The calibrated model is used to evaluate the potential welfare gains that would occur if alternative modes of water provision were implemented. We estimate that most of the potential distributional inefficiencies can be eliminated simply by making the frequency of deliveries the same across households which now face haphazard deliveries. This would require neither costly investments in infrastructure nor price increases. Author Affiliation: (a) Department of Economics, University of Michigan, United States (b) Nonresident Fellow, Resources for the Future (RFF), United States Article History: Received 11 January 2008; Revised 6 September 2008; Accepted 22 September 2008

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2009.03.016 Byline: Jurij MiheliA (a), Amine Mahjoub (b), Christophe Rapine (c), Borut RobiA (a) Keywords: Complexity theory; Uncertainty modeling; Scenarios; Combinatorial optimization; Decision analysis; Network flows Abstract: A significant input-data uncertainty is often present in practical situations. One approach to coping with this uncertainty is to describe the uncertainty with scenarios. A scenario represents a potential realization of the important parameters of the problem. In this paper we apply a recent approach, called flexibility, to solving two-stage flexible-choice problems. The first stage represents the present, where a decision maker must plan ahead to make a decision to hedge against uncertainty in the second stage, which represents the uncertain future, and is described as a set of scenarios. When one of the future scenarios is realized, a decision maker is willing to pay some recourse cost to augment the earlier solution to be more suitable for the realized scenario. Since all of the future scenarios are known, it is reasonable to presume that their desired solutions are also known. Thus, the aim of a decision maker is to find a solution in the present that is as easy as possible to adapt to solutions in the future. In this paper we study the problem where feasible solutions of the first stage are all p-element subsets of some finite set, and the solutions of the second stage are fixed p-element subsets. We present computational complexity results and algorithms for two versions of the two-stage flexible-choice problem. We formally define both problems, i.e., the sum-flexibility problem and the max-flexibility problem. For the sum-flexibility problem we describe an exact polynomial-time algorithm for the 3-scenario version, and we show non-approximability for the 4-scenario version. For the max-flexibility problem we show that the 3-scenario version is NP-hard, but approximable within a constant performance guarantee. Additionally, we prove non-approximability for the 4-scenario version of the problem. Author Affiliation: (a) Faculty of Computer and Information Science, University of Ljubljana, Ljubljana, Slovenia (b) UTIC, Higher School of Sciences and Techniques of Tunis, Tunis, Tunisia (c) G-SCOP Laboratory, Grenoble, France Article History: Received 11 March 2008; Accepted 12 March 2009

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.05.006 Byline: Nicolas Coeurdacier (a)(e), Robert Kollmann (b)(c)(e), Philippe Martin (d)(e) Keywords: Capital accumulation; International equity and bond portfolios; Capital flows; Current account; Valuation effects; Terms of trade Abstract: Despite the liberalization of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanations of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation and international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuations in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows. Author Affiliation: (a) Department of Economics, London Business School, Regent's Park, London NW1 4SA, United Kingdom (b) ECARES, Universite Libre de Bruxelles, CP 114, 50 Av. Franklin Roosevelt, B-1050 Brussels, Belgium (c) Faculte de Sciences Economiques, Universite Paris XII, 61 Av. du Gen. de Gaulle, 94000, Creteil, France (d) Sciences Po, 27 rue Saint-Guillaume, 75007 Paris, France (e) CEPR, 53-5 Gt. Sutton Street, London EC1V ODG, United Kingdom Article History: Received 30 June 2008; Revised 18 May 2009; Accepted 18 May 2009 Article Note: (footnote) [star] An is posted on the corresponding author's web page. We thank Mick Devereux and two anonymous referees for helpful comments and advice. We also thank Kosuke Aoki, Matthias Doepke, Stephane Guibaud, Viktoria Hnatkovska, Mathias Hoffmann and Giovanni Lombardo for detailed and constructive discussions. For comments, we are also grateful to Luca Dedola, Pierre-Olivier Gourinchas, Harald Hau, Jonathan Heathcote, Akito Matsumoto, Werner Roeger, Alan Sutherland and Pedro Teles, and to workshop participants at IMF-JIE conference 'International Macro-Finance', AEA 2009, RES 2008, SED 2008, Bundesbank Spring conference, ESSIM (CEPR), EU Commission (DG ECFIN), Bank of Portugal, Bank of Italy, San Francisco Fed, Dallas Fed, EUI (Florence), Birkbeck, City University (London) and at the Universities of Zurich, Leicester and Gent. R. Kollmann thanks ECARES, the National Bank of Belgium and the EU Commission (DG ECFIN) for financial support. Philippe Martin thanks the Institut Universitaire de France for financial help.

This paper studies the spillover effects of economic fluctuations in the United States on economic activity in Latin America and the Caribbean. Fluctuations in U.S. GDP growth have spillover effects that stimulate real growth and accelerate price inflation across many countries. Underlying these spillover effects are significant movements in private consumption, and to a larger extent, private investment. Openness to the United States has significant effects that accelerate growth of exports and/or imports across many countries. The net effects on the trade and current account balances vary across countries. Overall, the evidence supports concerns about adverse spillover effects of a slowdown in the U.S. economy on neighboring countries, necessitating careful mobilization of countercyclical domestic tools to hedge against potential risk and mitigate the severity of economic downturns. Keywords: business cycle synchronization, linkages, bilateral trade flows, spillover effects JEL Classification Codes: E32, F41, F42, F15, O10, Recent fluctuations in the U.S. economy have sparked a wave of concerns about the likely spillover effects of a slowdown on global economic conditions. Countries in Latin America and the [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2008.09.001 Byline: F.I. Dehayem Nodem (a), J.P. Kenne (a), A. Gharbi (b) Keywords: Manufacturing systems; Numerical methods; Optimal control; Production planning; Imperfect repairs; Damage failures; Replacement Abstract: In this paper, we analyse an optimal production, repair and replacement problem for a manufacturing system subject to random machine breakdowns. The system produces parts, and upon machine breakdown, either an imperfect repair is undertaken or the machine is replaced with a new identical one. The decision variables of the system are the production rate and the repair/replacement policy. The objective of the control problem is to find decision variables that minimize total incurred costs over an infinite planning horizon. Firstly, a hierarchical decision making approach, based on a semi-Markov decision model (SMDM), is used to determine the optimal repair and replacement policy. Secondly, the production rate is determined, given the obtained repair and replacement policy. Optimality conditions are given and numerical methods are used to solve them and to determine the control policy. We show that the number of parts to hold in inventory in order to hedge against breakdowns must be readjusted to a higher level as the number of breakdowns increases or as the machine ages. We go from the traditional policy with only one high threshold level to a policy with several threshold levels, which depend on the number of breakdowns. Numerical examples and sensitivity analyses are presented to illustrate the usefulness of the proposed approach. Author Affiliation: (a) Mechanical Engineering Department, Production Technologies Integration Laboratory, Ecole de Technologie Superieure, 1100 Notre Dame Street West, Montreal, Que., Canada H3C 1K3 (b) Automated Production Engineering Department, Production System Design and Control Laboratory, Ecole de Technologie Superieure, 1100 Notre Dame Street West, Montreal, Que., Canada H3C 1K3 Article History: Received 4 July 2007; Accepted 1 September 2008

Barrier caps, floors, and swaptions are priced in a closed form via the time-changed technique under the market models. The parameters of the resulting formulas can be easily extracted from [...]

Hedging is a strategy that uses two counterbalancing investments in order to minimize the impact of unexpected price fluctuations. Because hedging requires purchasing at least two different investments at the same time, by itself hedging increases the cost of investing. However when a hedging strategy reduces investment risk, less capital and more borrowed funds can be used in the investment process. This greater leverage can be used to increase return. The problem is that the teaching of investment hedging techniques in an undergraduate setting can be challenging. The author illustrates some of the challenge by reviewing hedging tools and discussing the hedging of T-Bill futures. The author further suggests that teaching a 130/30 hedging strategy will be easier for undergraduates to grasp., INTRODUCTION The typical investor buys and sells individual investment positions with the expectation of buying into a position 'low' and then later selling the position 'high.' This approach to investing [...]

We study a dynamic asset allocation problem in which stock returns exhibit short-run momentum and long-run mean reversion. We develop a tractable continuous-time model that captures these two predictability features and derive the optimal investment strategy in closed form. The model predicts negative hedging demands for medium-term investors, and an allocation to stocks that is nonmonotonic in the investor's horizon. Momentum substantially increases the economic value of hedging time variation in investment opportunities. These utility gains are preserved when we impose realistic borrowing and short-sales constraints and allow the investor to trade on a monthly frequency. Key words: portfolio choice; investment criteria; financial institutions; investment History: Received June 6, 2008; accepted January 23, 2009, by David A. Hsieh, finance. Published online in Articles in Advance April 23, 2009., 1. Introduction Equity returns tend to continue over short horizons (momentum) and revert over longer horizons (mean reversion). (1) If stock returns are predictable, an investor modifies her optimal strategy [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jfineco.2008.04.007 Byline: Tim Adam (a)(b) Keywords: Risk management; Hedging; Insurance; Instrument choice; Speculation Abstract: This paper analyzes why gold mining firms use options instead of linear strategies to hedge their gold price risk. Consistent with financial constraints based theories, the largest and least financially constrained firms are the most likely to hedge with insurance strategies (put options), while more constrained firms finance the purchase of puts by selling calls (collars). The most financially constrained firms use strategies that involve selling calls. Firms with large investment programs are also more likely to use insurance rather than linear strategies. Firms' hedging instrument choices are also correlated with current market conditions, suggesting that managers' market views partially drive hedging instrument choices. Author Affiliation: (a) Humboldt-Universitat zu Berlin, School of Business and Economics, Spandauer Str. 1, 10178 Berlin, Germany (b) Risk Management Institute, National University of Singapore, Singapore Article History: Received 22 December 2005; Revised 3 June 2007; Accepted 14 April 2008 Article Note: (footnote) [star] I would like to thank Simon Benninga, Sugato Bhattarcharyya, Greg Brown, Kalok Chan, Eitan Goldman, Gunter Dufey, Joseph Fan, Chitru Fernando, Charles Hadlock, David Haushalter, Dirk Jenter, Alberto Moel, Tim Opler, John Parsons, Peter Tufano, and seminar participants at the annual meeting of the Western Finance Association, Boston University, Erasmus University, the University of Michigan, the University of Oklahoma, the Hong Kong University of Science and Technology, Nanyang Technological University, and the National University of Singapore for valuable comments and suggestions. I am especially grateful to an anonymous referee, who helped to significantly improve the paper. Thanks also go to Ted Reeve for providing me with his derivatives surveys. Any remaining errors are my own.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jimonfin.2008.12.004 Byline: David E. Rapach (a), Mark E. Wohar (b) Abstract: We investigate the intertemporal hedging demands for stocks and bonds for investors in the U.S., Australia, Canada, France, Germany, Italy, and U.K. Using the methodology of Campbell et al. [Campbell, J.Y., Chan, Y.L., Viceira, L.M., 2003a. A multivariate model of strategic asset allocation. Journal of Financial Economics 67(1), 41-81], we solve a multi-period portfolio choice problem for an investor in each country with an infinite horizon and Epstein-Zin-Weil utility, where the dynamics governing asset returns are described by a vector autoregressive process. We find sizable mean intertemporal hedging demands for domestic stocks in the U.S. and U.K. and considerably smaller mean hedging demands for domestic stocks in the other countries. An investor in the U.S. who has access to foreign stocks and bonds displays small mean intertemporal hedging demands for foreign stocks and bonds, while investors in Australia, Canada, France, Germany, Italy, and the U.K. who have access to U.S. stocks and bonds all exhibit sizable mean hedging demands for U.S. stocks. Author Affiliation: (a) Department of Economics Saint Louis University, 3674 Lindell Boulevard, Saint Louis, MO 63108-3397, USA (b) Department of Economics, University of Nebraska at Omaha, RH-512K, Omaha, NE 68182-0286, USA Article Note: (footnote) [star] The results reported in this paper were generated using GAUSS 6.0. A data appendix, all unreported results, and the GAUSS programs are available at http://pages.slu.edu/faculty/rapachde/. Some of the GAUSS programs are based on MATLAB programs available on John Campbell's web page at http://kuznets.fas.harvard.edu/[approximately equal to]campbell/data.html.

In this study, we examine the relationship between a cross-section of realized equity returns and a value-at-risk (VaR) measure. Although we find that the measure of VaR is consistent across time, we find that the relationship between VaR and cross-sectional returns varies across time. Specifically, we find that the relationship between VaR and cross-sectional returns is much stronger in the month of January than in the remainder of the year. We make the conjecture that the seasonality in the relationship between VaR and returns is consistent with the tax-loss-selling hypothesis., Introduction For decades, documented evidence has exhibited abnormally high stock returns during the month of January, compared to the remainder of the year (e.g., Wachtel, 1942; Basu, 1983; Kiem, 1983). [...]

Recently S. A. Clark published an interesting duality result in linear conic programming dealing with a convex cone that is not closed in which the usual (algebraic) dual problem is [...]

We apply regret theory, an axiomatic behavioral theory, to derive closed-form solutions to optimal currency hedging choices. Investors experience regret of not having chosen the ex post optimal hedging decision. Hence, investors anticipate their future experience of regret and incorporate it in their objective function. We derive a model of financial decision-making with two components of risk: traditional risk (volatility) and regret risk. We find results that are in sharp contrast with traditional expected utility, loss aversion, of disappointment aversion theories. We discuss the empirical implications of our model and its ability to explain observed hedging behavior. Keywords: Regret aversion Loss aversion Hedging Portfolio choices

This paper analyzes the expected life-time utility and the hedging demands in an exchange only, representative agent general equilibrium under incomplete information. We derive an expression for the investor's expected life-time utility, and analyze his hedging demands for intertemporal changes in the stochastic unobservable growth of the endowment process and the changing quality of information regarding these changes. The hedging demands consist of two components, which could work in opposite directions so that a conservative consumer may end up having positive hedging demands. Our results are qualitatively different from those prevailing under constant growth (cf. [Brennan, M.J., 1998. The role of learning in dynamic portfolio decisions. European Finance Review, 1, 295-306; Ziegler, A., 2003. Incomplete Information and Heterogeneous Beliefs in Continuous-Time Finance. Springer, Berlin, Chapter 2]. JEL classification: C13; G11; G12 Keywords: Learning; Incomplete information; Equilibrium; Hedging demands

News reports of scientific research are rarely hedged; in other words, the reports do not contain caveats, limitations, or other indicators of scientific uncertainty. Some have suggested that hedging may influence news consumers' perceptions of scientists' and journalists' credibility (perceptions that may be related to support for scientific research and/or adoption of scientific recommendations). But whether hedging does affect audience perceptions is unknown. A multiple-message experiment (N = 601) found that across five messages, both scientists and journalists were viewed as more trustworthy (a) when news coverage of cancer research was hedged (e.g., study limitations were reported) and (b) when the hedging was attributed to the scientists responsible for the research (as opposed to scientists unaffiliated with the research).

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2008.05.012 Byline: Hanno Lustig (a), Christopher Sleet (b), Sevin Yeltekin (b) Abstract: We analyze optimal fiscal and monetary policy in an economy with distortionary labor income taxes, nominal rigidities, nominal debt of various maturities and short-selling constraints. Optimal policy prescribes the almost exclusive use of long term debt. Such debt mitigates the distortions associated with hedging fiscal shocks by allowing the government to allocate them efficiently across states and periods. Author Affiliation: (a) UCLA, USA (b) Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213, USA Article History: Received 21 February 2006; Revised 30 April 2008; Accepted 9 May 2008

ABSTRACT This paper simulates the stock market, during the bull market period, and attempts to speculate and profit from buying stocks with a sharp drop in excess of 10% and [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2006.08.019 Byline: Domenico De Giovanni (d), Sergio Ortobelli (a), Svetlozar Rachev (b)(c) Keywords: Delta hedging; Subordinated models; Option pricing; Stable motion; Incomplete markets Abstract: In this paper we implement dynamic delta hedging strategies based on several option pricing models. We analyze different subordinated option pricing models and we examine delta hedging costs using ex-post daily prices of S&P 500. Furthermore, we compare the performance of each subordinated model with the Black-Scholes model. Author Affiliation: (a) Department of Mathematics, Institute of Economy, University of Bergamo, Italy (b) University of Karlsruhe, Germany (c) University of California, Santa Barbara, CA, USA (d) University of Calabria, Italy

Entering the EMU removes currency risk for assets originating in the Euro area while diversification opportunities are likely reduced. Taking the perspective of an investor in one of the 12 countries that joined the EU in 2004-2007, we contrast actual optimal composition of international equity holdings against two artificial scenarios: costless hedging against exchange rate risk and presuming the local market to be part of the EMU. State specific optimal portfolios are determined from realized covariances for the period 2000-2006. Optimized risk is found smaller under currency unification and implied Sharp ratios signal significant benefits of EMU participation. JEL classification: F21; F33; F36; G15 Keywords: Portfolio allocation; EMU expansion; Currency hedging; Realized volatility

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2006.12.051 Byline: Flavio Pressacco, Marcellino Gaudenzi, Antonino Zanette, Laura Ziani Keywords: Option pricing; Hedging; American puts; Tree methods; Finite difference methods; American premium Abstract: With reference to the evaluation of the speed-precision efficiency of pricing and hedging of American Put options, we present and discuss numerical results obtained on the basis of four different large enough random samples according to the relevance of the American quality (relative importance of the early exercise opportunity) of the options. Here we provide a comparison of the best methods (lattice based numerical methods and an approximation of the American Premium analytical procedure) known in literature along with some key methodological remarks. Author Affiliation: Dipartimento di Finanza dell'Impresa e dei Mercati Finanziari, Universita di Udine, via Tomadini 30/A, Udine, Italy Article History: Received 5 September 2005; Accepted 22 December 2006 Article Note: (footnote) [star] Paper with financial support of national funds 40%, of the land Friuli Venezia Giulia-research project: 'Modelli Matematici Innovativi per lo Studio dei Rischi Finanziari e Assicurativi'. The work of Laura Ziani was supported by CRUP Foundation-research project: 'Toward Total Quality in Pricing American Put Options'.

Even well-managed emerging market economies are exposed to significant external risk, the bulk of which is financial. At a moment's notice, these economies may be required to reverse the capital inflows that have supported the preceding boom. While capital flows crises are sudden nonlinear events (sudden stops), their likelihood fluctuates over time. The question we address in the paper is how should a country react to these fluctuations. Depending on the hedging possibilities the country faces, the options range from pure self-insurance to hedging the sudden stop jump itself. In between, there is the more likely possibility to hedge the smoother fluctuations in the likelihood of sudden stops. The main contribution of the paper is to provide an analytically and empirically tractable model that allows us to characterize and quantify optimal contingent liability management in a variety of scenarios. We show, with a concrete example, that the gains from contingent liability management can easily exceed the equivalent of cutting a country's external liabilities by 10% of GDP. JEL classification: E2; E3; F3; F4; G0; C1 Keywords: Capital flows; Sudden stops; Financial constraints; Contractions; Hedging; Insurance; Signals

Under the arbitrage-free framework of the HJM model (Heath, Jarrow and Morton [1992]), this article simultaneously extends the BGM model (Brace, Gatarek and Musiela [1997])from a single-currency economy to a [...]