Advanced Search
MyIDEAS: Login to save this article or follow this journal

Utility-Based Valuation and Hedging of Basis Risk With Partial Information

Contents:

Author Info

  • Michael Monoyios
Registered author(s):

    Abstract

    We analyse the valuation and hedging of a claim on a non-traded asset using a correlated traded asset under a partial information scenario, when the asset drifts are unknown constants. Using a Kalman filter and a Gaussian prior distribution for the unknown parameters, a full information model with random drifts is obtained. This is subjected to exponential indifference valuation. An expression for the optimal hedging strategy is derived. An asymptotic expansion for small values of risk aversion is obtained via partial differentiation equation (PDE) methods, following on from payoff decompositions and a price representation equation. Analytic and semi-analytic formulae for the terms in the expansion are obtained when the minimal entropy measure coincides with the minimal martingale measure. Simulation experiments are carried out which indicate that the filtering procedure can be beneficial in hedging, but sometimes needs to be augmented with the increased option premium, which takes into account parameter uncertainty in order to be effective. Empirical examples are presented which conform to these conclusions.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504861003650883
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 17 (2010)
    Issue (Month): 6 ()
    Pages: 519-551

    as in new window
    Handle: RePEc:taf:apmtfi:v:17:y:2010:i:6:p:519-551

    Contact details of provider:
    Web page: http://www.tandfonline.com/RAMF20

    Order Information:
    Web: http://www.tandfonline.com/pricing/journal/RAMF20

    Related research

    Keywords: Indifference valuation; partial information; basis risk; filtering;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:17:y:2010:i:6:p:519-551. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.