Risky Production and Hedging in Emerging Markets
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.
KeywordsRisk Premium Risky Asset Full Coverage Initial Wealth Background Risk
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