How to Avoid a Hedging Bias
AbstractIn this paper, the effects of so-called model misspecification and the effects of dropping the assumption that continuous rebalancing is possible are examined. Strategies which are robust if applied continuously fail to be robust if applied in discrete time. Therefore, the hedging bias which originates from the effects of time-discretising strategies is analysed. It turns out that a systematic hedging bias can only be avoided if a discrete-time hedging model is used. It is shown how the robustness property for convex payoffs is recovered while at the same time the hedging bias is avoided.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse34_2002.
Date of creation: Nov 2002
Date of revision:
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Model misspecification; hedging strategies; convex payoffs; superhedging; discrete-time trading;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-12-17 (All new papers)
- NEP-FIN-2002-12-17 (Finance)
- NEP-RMG-2002-12-17 (Risk Management)
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