Abstract - Income Hedging and Asset Prices

This study examines whether financial assets can serve as effective instruments for hedging primary household risks such as income risk and whether those hedging-induced demand shifts influence prices of financial assets. We find that among the set of financial assets, the value-minus-growth (HML) portfolio serves as the most effective instrument for hedging income risk. Further, income hedging-induced demand predicts the future returns of value-minus-growth portfolios. The future aggregate value premium as well as the returns of state-level value-minus-growth portfolios are higher when income hedging-induced demands are high. In economic terms, one standard deviation shift in hedging demand is associated with 1.29% higher HML return next month. This evidence of predictability weakens as the predictability horizon increases, which suggests that hedging-induced demand shifts only have short-term impact on asset prices.


Alok Kumar
University of Miami, School of Business Administration
23. Apr. 2013

Back to overview