Risky Production and Hedging in Emerging Markets

  • Octave Jokung
Part of the Centre for the Study of Emerging Markets Series book series (CSEM)


Several financial decisions are made in the presence of more than one single source of risk. Among those risks, the class of non-tradable risks or background risks is preeminent. This chapter addresses the question of whether an increase in initial wealth leads an individual to hedge in the forward market in the presence of a background risk.We also analyse how far the behaviour of the decision-maker is affected by the presence and the modification of a non-tradable risk like nondiversifiable income, human capital, political risk, non-marketable assets, informational asymmetries and irreplaceable commodities. This is the case when investing in emerging markets, where investors face two sources of risk: economic risk and background risk. Investors in emerging markets face non-tradable risks which add background to their investment, and when this background risk increases the investors’ willingness to hold risky assets must decrease.


Risk Premium Risky Asset Full Coverage Initial Wealth Background Risk 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Adam-Müller, A.F.A. (1997) ‘Export and Hedging Decisions under Revenue and Exchange Rate Risk: A Note’, European Economic Review, no. 41, pp. 1421–6.Google Scholar
  2. Adam-Müller, A.F.A. (2000) ‘Hedging Price Risk when Real Wealth Matters’, Journal of International Money and Finance, no. 19, pp. 549–60.Google Scholar
  3. Arrow, K.J. (1971) ‘Exposition of the Theory of Choice under Uncertainty’, in K.J. Arrow, Essays in the Theory of Risk Bearing (Amesterdam: Elsevier).Google Scholar
  4. Briys, E., Crouhy, M. and Schlesinger, H. (1993) ‘Optimal Hedging in a Futures Market with Background Noise and Basis Risk’, European Economic Review, no. 37, pp. 949–60.Google Scholar
  5. Briys, E. and Schlesinger, H. (1993) ‘Optimal Hedging when Preferences are State Dependent’, Journal of Futures Markets, no. 13, pp. 441–51.Google Scholar
  6. Doherty, N. and Schlesinger, H. (1993) ‘Optimal Insurance in Incomplete Markets’, Journal of Political Economy, vol. 91, pp. 1045–54.CrossRefGoogle Scholar
  7. Dor, E. and Jokung, O. (2005) ‘Expected or non Expected Utility and the Optimal Choice of Saving and Endogenous Capital Risk’, in Changing Models G. Giappichelli (ed.) (Torino: Kluwer), forthcoming.Google Scholar
  8. Eeckhoudt, L. and Kimball, M. (1992) ‘Background Risk, Prudence and Insurance Demand’, in G. Dionne (ed.), Contributions to Insurance Economics (Dordrecht: Kluwer), pp. 239–55.CrossRefGoogle Scholar
  9. Eeckhoudt, L., Gollier, C. and Schlesinger, H. (1996) ‘Changes in Background Risk and Risk Taking Behaviour’, Econometrica, vol. 64, no. 3, pp. 683–89.CrossRefGoogle Scholar
  10. Elmendorf, D. and Kimball, M. (2000) ‘Taxation of Labor Income and the Demand for Risky Assets’, International Economic Review, vol. 41, no. 3, pp. 801–33.CrossRefGoogle Scholar
  11. Franke, G., Stapelton, R.C. and Subrahmanyam, M.G. (1998) ‘Who Buys and Who Sells Options: The Role of Options in a Economy with Background Risk’, Journal of Economic Theory, vol. 82, pp. 89–109.CrossRefGoogle Scholar
  12. Gollier, C. and Pratt, J. (1996) ‘Risk Vulnerability and the Tempering Effect of Background Risk’, Econometrica, vol. 64, no. 5, pp. 1109–23.CrossRefGoogle Scholar
  13. Jokung, O. (2002) ‘The Effects of Background Risk on Optimal Portfolios’, in I. Hasan and W.C. Hunter (eds), Research in Banking and Finance, vol. 2 (Amesterdam: Elsevier), pp. 123–47.Google Scholar
  14. Jokung, O. (2004) ‘Risky Assets, and Hedging in Emerging Markets’, Economics and Financial Modelling, Summer.Google Scholar
  15. Kihlstrom, R., Romer, D. and Williams, S. (1981) ‘Risk Aversion with Random Initial Wealth’, Econometrica, vol. 49, pp. 911–20.CrossRefGoogle Scholar
  16. Kimball, M. (1990) ‘Precautionary Savings in the Small and in the Large’, Econometrica, vol. 58, no. 1, pp. 53–73.CrossRefGoogle Scholar
  17. Kimball, M. (1993) ‘Standard Risk Aversion’, Econometrica, vol. 61, no. 3, pp. 589–611.CrossRefGoogle Scholar
  18. Mayers, D. and Smith, C.W. (1983) ‘The Interdependence of Individual Portfolio Decisions and the Demand for Insurance’, Journal of Political Economy, 91, no. 2, pp. 304–11.CrossRefGoogle Scholar
  19. Pratt, J. and Zeckhauser, R. (1987) ‘Proper Risk Aversion’, Econometrica, vol. 55, no. 1, pp. 143–54.CrossRefGoogle Scholar
  20. Pratt, J. (1988) ‘Aversion to One Risk in the Presence of Others’, Journal of Risk and Uncertainty, vol. 1, pp. 396–413.CrossRefGoogle Scholar

Copyright information

© Octave Jokung 2005

Authors and Affiliations

  • Octave Jokung

There are no affiliations available

Personalised recommendations