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Cross Hedging and Liquidity: a note

Listed author(s):
  • Sévi, B.

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.

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Paper provided by CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1 in its series Cahiers du CREDEN (CREDEN Working Papers) with number 03.11.43.

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Length: 14 pages
Date of creation: 2003
Handle: RePEc:mop:credwp:03.11.43
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CREDEN, Faculté d'Economie, Avenue Raymond Dugrand, CS 79606, 34960 MONTPELLIER Cedex 2, France

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