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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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    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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