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A Robust Approach to Hedging and Pricing in Imperfect Markets

Author

Listed:
  • Hirbod Assa

    (Institute for Financial and Actuarial Mathematics, University of Liverpool, Mathematical Sciences Building, Peach Street, Liverpool L69 7ZL, UK)

  • Nikolay Gospodinov

    (Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street N.E., Atlanta, GA 30309-4470, USA)

Abstract

This paper proposes a model-free approach to hedging and pricing in the presence of market imperfections such as market incompleteness and frictions. The generality of this framework allows us to conduct an in-depth theoretical analysis of hedging strategies with a wide family of risk measures and pricing rules, and study the conditions under which the hedging problem admits a solution and pricing is possible. The practical implications of our proposed theoretical approach are illustrated with an application on hedging economic risk.

Suggested Citation

  • Hirbod Assa & Nikolay Gospodinov, 2017. "A Robust Approach to Hedging and Pricing in Imperfect Markets," Risks, MDPI, vol. 5(3), pages 1-20, July.
    • Handle: RePEc:gam:jrisks:v:5:y:2017:i:3:p:36-:d:105112
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    References listed on IDEAS

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