Welcome Tp CRETA! Contact Us at : +886.2.3366.1072
CRETA Workshop on Risk Theory 01 - 27 December 2012, Kuan Te Lecture Hall, 2F, Bldg. 1, College of Management, NTU
CRETA is honored to invite Professor W. Henry Chiu from University of Manchester as a visitor from Dec. 26- Dec. 29. During his visit, Prof. Chiu will give a lecture on Optimal Risk Management Decisions, Dependent Risk, and Risk Aversion in a General Two-Parameter Model on CRETA Workshop on Risk Theory 01. The workshop is due to take place on Dec. 27 (Thu.) at Kuan Te Lecture Hall, 2F, Bldg. 1, College of Management, NTU (台大管理學院一號館 2 樓冠德講堂). All participants are welcomed! Please be sure to register your attendance online by noon, Dec. 21 (Fri.).
*Date: Dec. 27 (Thu.), 2012, 10:00 am – 12:00 pm
*Venue: Kuan Te Lecture Hall, 2F, College of Management, NTU
(台灣大學管理學院一號館 2F 冠德講堂)
*Topic: Optimal Risk Management Decisions, Dependent Risk, and Risk Aversion in a General Two-Parameter Model
As increasingly recognized in the literature, given incomplete asset markets, individuals typically make risk management decisions such as portfolio and insurance choices in the presence of uninsurable background risk, and they tend not to view the endogenous and background risks as independent or uncorrelated. It has been demonstrated that with correlated endogenous and background risks, well-known results on risk management decisions can be overturned. Nevertheless, existing comparative statics and comparative risk aversion results are typically derived assuming the absence of correlated background risk. Furthermore, while there are recent advances in characterizing optimal decisions in the presence of correlated background risk, they are made assuming the Expected Utility framework despite its well-documented violations. In the first part of this lecture, we show that given the linear two-risk structure of the decision-under-risk problems for which characterizations of optimal decisions and comparative statics/risk aversion results exist, under appropriate conditions on the correlation between the endogenous and background risks, general characterizations of optimal decisions as well as comparative statics/risk aversion results can be obtained using a two-parameter framework assuming only utility-representable preferences over distributions.
The second part of this lecture focuses on the particular problem of optimal hedging and its relation with risk aversion. While hedging using the likes of futures contracts is seen as a risk-mitigating activity akin to insurance purchasing, it has been shown that a more risk-averse hedger may not hedge more if the settlement price is not perfectly correlated with the future spot price. We first identify in this part of the lecture a necessary and sufficient condition on the correlation between the settlement and future spot prices for a deviation in hedging ratio from the minimum-variance ratio to induce a mean-preserving spread in the hedger's final wealth. In our general two-parameter framework this entails a necessary and sufficient condition for the optimality of the minimum-variance hedging ratio given unbiased futures prices for all risk-averse utility-representable preferences, and for the optimal hedging ratio to be higher than the minimum-variance ratio if the futures price is higher than the expected future spot price. The condition on the settlement and spot prices is then shown to be also necessary and sufficient for a more risk averse hedger to choose a higher (lower) hedging ratio if the futures price is lower (higher) than the expected future spot price.
Professor Chiu is currently Senior Lecturer of Economics at School of Social Sciences, University of Manchester and also an Associate Editor of Management Science. Professor Chiu’s research interests focus on the Risk Theory and Risk Management. His research articles have been published in several prestigious journals, such as Management Science and Journal of Political Economy.
Dec. 27 (Thu.) Kuan Te Lecture Hall, 2F (二樓冠德講堂)
10:00-10:50: Lecture 1
10:50-11:10: Tea Break
11:10-12:00: Lecture 2
*Lecture in English