Hedging: Holding Stocks, Trading Bonds.

Abstract
Why do rational investors trade, and which assets do they choose? Classical no-trade theorems show that new information can move prices without inducing trade. This paper contrasts and qualifies that logic. In a dynamic economy with stochastic growth, several long-lived agents with heterogeneous risk aversion, time preferences, and income streams make consumption and portfolio decisions while trading stocks, a long-term bond, and short-term loans with one another. The closed-form equilibrium reveals that agents do not trade stocks, even though stock returns vary over time and remain predictable. Instead, they trade the long-term bond continuously to hedge growth shocks intertemporally, despite sharing common information and beliefs. Yet agents would cease trading if they gained access to a set of bond funds that add no spanning power, since dynamic strategies in the long bond replicate them. The model identifies long-term bonds as the natural asset class for hedging growth shocks.


Biography:
Marko Weber is an Assistant Professor in Mathematical Finance at the National University of Singapore. His current research focuses on markets with frictions, systemic risk and equilibrium models in incomplete markets. He holds a PhD from Scuola Normale Superiore, Italy. Before joining NUS, he worked as a postdoctoral researcher at Columbia University and as an associate at J.P. Morgan in London.