Abstract

This thesis consists of three essays in financial econometrics. In the first part of the thesis, motivated by different applications of hedging methods in the literature, we propose a general theoretical framework for hedging and pricing. First, we review briefly different strands of literature on hedging which have been developed in various
fields such as finance, economics, operations research and mathematics, and then try to come up with a tractable way for hedging and pricing in this paper. By introducing
different market principles, we study conditions under which the hedging problem has a solution and pricing is possible. We will conduct an in-depth theoretical analysis
of hedging strategies with shortfall risks as well as the spectral risk measures, in particular those associated with Choquet expected utility. We show that asymmetric information results in incorrect risk assessment and pricing. In the second part of the thesis, we will apply our results in the first part to construct an economic
risk hedge. We also introduce a general method to estimate the stochastic discount factors associated with different risk measures and different financial models. The
third part of the thesis modifies the speculative storage model by embedding staggered price features into the structural model of Deaton and Laroque (1996). In an attempt to replicate the stylized facts of observed commodity price dynamics, we add an additional source of intertemporal linkage to Deaton and Laroque (1996), namely speculation in intermediate-good inventories. The introduction of this type of friction into the model is motivated by its ability to increase price stickiness which gives rise to an increased persistence in the first and higher conditional moments of commodity prices. By incorporating intermediate risk neutral speculators and a final bundler with a staggered pricing rule in the spirit of Calvo (1983) into the storage model, we are able to capture a high degree of serial correlation and conditional heteroskedasticity, which are observed in actual data. The structural parameters of both Deaton
and Laroque (1996) and our modified models are estimated using actual prices for 8 agricultural commodities. Simulated data are then employed to assess the effects of
our staggered price approach on the time-series properties of commodity prices. Our results lend empirical support to the possibility of staggered prices.