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Cross Hedging and Liquidity: a note

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  • Sévi, B.

Abstract

Cross hedging is a way to improve statistical hedge results because of markets'incompletion. In this framework, several markets instead of just one market, are used to increase the hedger’s financial possibilities. In the Anderson-Danthine model (1981), the optimal hedge in the multivariate case is described and commented, but transaction costs are neglected. The aim of this note is to suggest a new version of the initial model, in which transaction costs are now taken into account. In a first step, benchmark case is formalized with deterministic costs. Secondly, we consider stochastic liquidity and statistical links between liquidity levels. In the first case, the intuitive non-optimality is shown as soon as transaction costs are integrated. In the second case, a more general model is suggested and a link is mentioned with the ”commonality in liquidity” concept.

Suggested Citation

  • Sévi, B., 2003. "Cross Hedging and Liquidity: a note," Cahiers du CREDEN (CREDEN Working Papers) 03.11.43, CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1.
  • Handle: RePEc:mop:credwp:03.11.43
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    File URL: http://www.creden.univ-montp1.fr/downloads/cahiers/CC-03-11-43.pdf
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    References listed on IDEAS

    as
    1. Philippe Choné & Laurent Flochel & Anne Perrot, 1999. "Allocating and Funding Universal Service Obligations in a Competitive Network Market," Working Papers 99-55, Center for Research in Economics and Statistics.
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    3. Madet, C. & Mirabel, F. & Poudou, J.-C. & Roland, M., 2004. "Funding Universal Service Obligations with an Essential Facility: Charges vs. Taxes and Subsidies," Cahiers du CREDEN (CREDEN Working Papers) 04.07.47, CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1.
    4. Mark Armstrong, 2001. "Access Pricing, Bypass, and Universal Service," American Economic Review, American Economic Association, vol. 91(2), pages 297-301, May.
    5. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-150, June.
    6. repec:crs:wpaper:9955 is not listed on IDEAS
    7. H. Cremer & F. Gasmi & A. Grimaud & J. J. Laffont, 2001. "Universal Service: An economic perspective," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 72(1), pages 5-43, March.
    8. Anton, James J & Vander Weide, James H & Vettas, Nikolaos, 1998. "Strategic Pricing and Entry under Universal Service and Cross-Market Price Constraints," CEPR Discussion Papers 1922, C.E.P.R. Discussion Papers.
    9. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2002. "Allocating and funding universal service obligations in a competitive market," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1247-1276, November.
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    More about this item

    Keywords

    CROSS HEDGING; LIQUIDITY; MEAN-VARIANCE UTILITY; COMMONALITY IN LIQUIDITY; TRANSACTION COSTS; HEDGING;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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