Using futures contracts to hedge macroeconomic risk in the public sector

This paper examines the use of derivatives contracts to hedge macroeconomic risk faced by the public sector. Specifically, it examines whether existing futures contracts can be effectively used to offset volatility in US state tax revenue. Little evidence of any simple systematic relationship betwee...

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Bibliographic Details
Published in:Journal of derivatives & hedge funds 2004-02, Vol.10 (1), p.54
Main Authors: Hinkelmann, Christoph, Swidler, Steve
Format: Article
Language:English
Subjects:
Aggregates
Consumer Price Index
Consumption
Deficit financing
Derivatives
Economic activity
Economic development
Economic indicators
Futures
GDP
Gross Domestic Product
Growth rate
Hedging
Human capital
Macroeconomics
Personal income
Public sector
Risk management
Standard deviation
State taxes
Studies
Tax revenues
Volatility
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Summary:This paper examines the use of derivatives contracts to hedge macroeconomic risk faced by the public sector. Specifically, it examines whether existing futures contracts can be effectively used to offset volatility in US state tax revenue. Little evidence of any simple systematic relationship between states' personal income and futures prices is found. Correspondingly, there is limited opportunity for states to manage the risk of revenue shortfalls using listed available futures contracts. Accordingly, the relation between state personal income and that of national aggregates is next examined as a prelude to potential new futures contracts based on economic indicators. Evidence is provided that hedging with these types of derivatives may be feasible, finally possible risk management strategies for the public sector are discussed. [PUBLICATION ABSTRACT]
ISSN:1753-9641
1753-965X