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Hedging Under Worst-Case-Scenario in a Market Driven by Time-Changed Lévy Noises

In: The Fascination of Probability, Statistics and their Applications

Author

Listed:
  • Giulia Di Nunno

    (University of Oslo, CMA and Department of Mathematics
    Norwegian School of Economics, Department of Business and Management Science, NHH)

  • Erik Hove Karlsen

    (University of Oslo, Department of Mathematics)

Abstract

In an incomplete market driven by time-changed Lévy noises we consider the problem of hedging a financial position coupled with the underlying risk of model uncertainty. Then we study hedging under worst-case-scenario. The proposed strategies are not necessarily self-financing and include the interplay of a cost process to achieve the perfect hedge at the end of the time horizon. The hedging problem is tackled in the framework of stochastic differential games and it is treated via backward stochastic differential equations. Two different information flows are considered and the solutions compared.

Suggested Citation

  • Giulia Di Nunno & Erik Hove Karlsen, 2016. "Hedging Under Worst-Case-Scenario in a Market Driven by Time-Changed Lévy Noises," Springer Books, in: Mark Podolskij & Robert Stelzer & Steen Thorbjørnsen & Almut E. D. Veraart (ed.), The Fascination of Probability, Statistics and their Applications, pages 465-499, Springer.
    • Handle: RePEc:spr:sprchp:978-3-319-25826-3_22
    DOI: 10.1007/978-3-319-25826-3_22
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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