Effectiveness of Hedging Strategies under Model Misspecification and Trading Restrictions
AbstractWe consider a standard two-player all-pay auction with private values, where the valuation for the object is private information to each bidder. The crucial feature is that one bidder is favored by the allocation rule in the sense that he need not bid as much as the other bidder to win the auction. Analogously, the other bidder is handicapped by the rule as overbidding the rival may not be enough to win the auction. Clearly, this has important implications on equilibrium behavior. We fully characterize the equilibrium strategies for this auction format and show that there exists a unique pure strategy Bayesian Nash Equilibrium.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse13_2002.
Date of creation: May 2002
Date of revision:
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Incomplete markets; model misspecification; trading restrictions; hedging; super-hedging; martingale measure; duplication costs; discretisation costs;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-07-04 (All new papers)
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- Nicole Branger & Christian Schlag, 2004. "Is volatility risk priced? Properties of tests based on option hedging errors," Money Macro and Finance (MMF) Research Group Conference 2003 8, Money Macro and Finance Research Group.
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