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Hedging under generalized good-deal bounds and model uncertainty

Author

Listed:
  • Dirk Becherer

    () (Humboldt-Universität)

  • Klebert Kentia

    () (Goethe-Universität)

Abstract

Abstract We study a notion of good-deal hedging, that corresponds to good-deal valuation and is described by a uniform supermartingale property for the tracking errors of hedging strategies. For generalized good-deal constraints, defined in terms of correspondences for the Girsanov kernels of pricing measures, constructive results on good-deal hedges and valuations are derived from backward stochastic differential equations, including new examples with explicit formulas. Under model uncertainty about the market prices of risk of hedging assets, a robust approach leads to a reduction or even elimination of a speculative component in good-deal hedging, which is shown to be equivalent to a global risk minimization in the sense of Föllmer and Sondermann (1986) if uncertainty is sufficiently large.

Suggested Citation

  • Dirk Becherer & Klebert Kentia, 2017. "Hedging under generalized good-deal bounds and model uncertainty," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 86(1), pages 171-214, August.
  • Handle: RePEc:spr:mathme:v:86:y:2017:i:1:d:10.1007_s00186-017-0588-y
    DOI: 10.1007/s00186-017-0588-y
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Good-deal bounds; Good-deal hedging; Model uncertainty; Incomplete markets; Multiple priors; Backward stochastic differential equations;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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