Hedging quantitative easing

Abstract

Arguably the greatest concern surrounding quantitative easing is its potential for expanding the money supply at a rate which outstrips the rate of growth in national output. This will almost surely lead to greater uncertainty in inflationary expectations and this, in turn, can have adverse consequences for stock prices. Our analysis employs the hedging procedures which underscore the Fundamental Theorem of Asset Pricing in conjunction with stochastic processes for stock prices and the money supply to design hedging strategies against potential downside movements in stock prices caused by the uncertainty in inflationary expectations associated with rapid monetary growth.