IDEAS home Printed from https://ideas.repec.org/p/tky/fseres/2014cf914.html
   My bibliography  Save this paper

Optimal Hedging for Fund & Insurance Managers with Partially Observable Investment Flows

Author

Listed:
  • Masaaki Fujii

    (Faculty of Economics, The University of Tokyo)

  • Akihiko Takahashi

    (Faculty of Economics, The University of Tokyo)

Abstract

   All the financial practitioners are working in incomplete markets full of unhedgeable risk-factors. Making the situation worse, they are only equipped with the imperfect information on the relevant processes. In addition to the market risk, fund and insurance managers have to be prepared for sudden and possibly contagious changes in the investment flows from their clients so that they can avoid the over- as well as under-hedging. In this work, the prices of securities, the occurrences of insured events and (possibly a network of) the investment flows are used to infer their drifts and intensities by a stochastic filtering technique. We utilize the inferred information to provide the optimal hedging strategy based on the mean-variance (or quadratic) risk criterion. A BSDE approach allows a systematic derivation of the optimal strategy, which is shown to be implementable by a set of simple ODEs and the standard Monte Carlo simulation. The presented framework may also be useful for manufactures and energy firms to install an efficient overlay of dynamic hedging by financial derivatives to minimize the costs.

Suggested Citation

  • Masaaki Fujii & Akihiko Takahashi, 2014. "Optimal Hedging for Fund & Insurance Managers with Partially Observable Investment Flows," CIRJE F-Series CIRJE-F-914, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2014cf914
    as

    Download full text from publisher

    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2014/2014cf914.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Huyên Pham, 2001. "Mean-Variance Hedging For Partially Observed Drift Processes," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 263-284.
    2. Dahl, Mikkel & Moller, Thomas, 2006. "Valuation and hedging of life insurance liabilities with systematic mortality risk," Insurance: Mathematics and Economics, Elsevier, vol. 39(2), pages 193-217, October.
    3. M. Mania & R. Tevzadze, 2003. "Backward Stochastic PDE and Imperfect Hedging," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(07), pages 663-692.
    4. Kohlmann, Michael & Tang, Shanjian, 2002. "Global adapted solution of one-dimensional backward stochastic Riccati equations, with application to the mean-variance hedging," Stochastic Processes and their Applications, Elsevier, vol. 97(2), pages 255-288, February.
    5. Masaaki Fujii & Akihiko Takahashi, 2013. "Making Mean-Variance Hedging Implementable in a Partially Observable Market," Papers 1306.3359, arXiv.org, revised Nov 2013.
    6. Masaaki Fujii & Akihiko Takahashi, 2013. "Making Mean-Variance Hedging Implementable in a Partially Observable Market -with supplementary contents for stochastic interest rates-," CARF F-Series CARF-F-332, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    7. Masaaki Fujii & Akihiko Takahashi, 2013. "Making Mean-Variance Hedging Implementable in a Partially Observable Market -with supplementary contents for stochastic interest rates-," CIRJE F-Series CIRJE-F-891, CIRJE, Faculty of Economics, University of Tokyo.
    8. Masaaki Fujii & Akihiko Takahashi, 2012. "Perturbative Expansion Technique for Non-linear FBSDEs with Interacting Particle Method," Papers 1204.2638, arXiv.org, revised Apr 2012.
    9. Masaaki Fujii & Akihiko Takahashi, 2013. "Making Mean-Variance Hedging Implementable in a Partially Observable Market," CARF F-Series CARF-F-321, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    10. Łukasz Delong & Russell Gerrard, 2007. "Mean-variance portfolio selection for a non-life insurance company," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 66(2), pages 339-367, October.
    11. Xiong, Jie, 2008. "An Introduction to Stochastic Filtering Theory," OUP Catalogue, Oxford University Press, number 9780199219704.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Masaaki Fujii, 2014. "A Polynomial Scheme of Asymptotic Expansion for Backward SDEs and Option pricing," CARF F-Series CARF-F-343, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Dec 2014.
    2. Masaaki Fujii, 2014. "A Polynomial Scheme of Asymptotic Expansion for Backward SDEs and Option pricing," CIRJE F-Series CIRJE-F-931, CIRJE, Faculty of Economics, University of Tokyo.
    3. Masaaki Fujii, 2014. "A Polynomial Scheme of Asymptotic Expansion for Backward SDEs and Option pricing," Papers 1405.0378, arXiv.org, revised Dec 2014.
    4. Masaaki Fujii, 2016. "A polynomial scheme of asymptotic expansion for backward SDEs and option pricing," Quantitative Finance, Taylor & Francis Journals, vol. 16(3), pages 427-445, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Masaaki Fujii & Akihiko Takahashi, 2014. "Optimal Hedging for Fund & Insurance Managers with Partially Observable Investment Flows," CARF F-Series CARF-F-338, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Masaaki Fujii & Akihiko Takahashi, 2014. "Optimal Hedging for Fund & Insurance Managers with Partially Observable Investment Flows," Papers 1401.2314, arXiv.org, revised Jul 2014.
    3. Masaaki Fujii & Akihiko Takahashi, 2014. "Optimal Hedging for Fund & Insurance Managers with Partially Observable Investment Flows," CARF F-Series CARF-F-348, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Masaaki Fujii, 2014. "A Polynomial Scheme of Asymptotic Expansion for Backward SDEs and Option pricing," Papers 1405.0378, arXiv.org, revised Dec 2014.
    5. Masaaki Fujii, 2014. "A Polynomial Scheme of Asymptotic Expansion for Backward SDEs and Option pricing," CARF F-Series CARF-F-343, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Dec 2014.
    6. Masaaki Fujii, 2014. "A Polynomial Scheme of Asymptotic Expansion for Backward SDEs and Option pricing," CIRJE F-Series CIRJE-F-931, CIRJE, Faculty of Economics, University of Tokyo.
    7. Masaaki Fujii & Akihiko Takahashi, 2013. "Making Mean-Variance Hedging Implementable in a Partially Observable Market -with supplementary contents for stochastic interest rates-," CIRJE F-Series CIRJE-F-891, CIRJE, Faculty of Economics, University of Tokyo.
    8. Masaaki Fujii & Akihiko Takahashi, 2013. "Making Mean-Variance Hedging Implementable in a Partially Observable Market -with supplementary contents for stochastic interest rates-," CARF F-Series CARF-F-332, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    9. Masaaki Fujii & Akihiko Takahashi, 2013. "Making Mean-Variance Hedging Implementable in a Partially Observable Market," CARF F-Series CARF-F-321, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    10. Akihiko Takahashi, 2015. "Asymptotic Expansion Approach in Finance," CARF F-Series CARF-F-356, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Aug 2015.
    11. Masaaki Fujii & Akihiko Takahashi, 2013. "Making Mean-Variance Hedging Implementable in a Partially Observable Market," Papers 1306.3359, arXiv.org, revised Nov 2013.
    12. M. Mania & R. Tevzadze & T. Toronjadze, 2007. "$L^2$-approximating pricing under restricted information," Papers 0708.4095, arXiv.org.
    13. M. Mania & R. Tevzadze & T. Toronjadze, 2007. "Mean-variance Hedging Under Partial Information," Papers math/0703424, arXiv.org.
    14. Plat, Richard, 2009. "Stochastic portfolio specific mortality and the quantification of mortality basis risk," Insurance: Mathematics and Economics, Elsevier, vol. 45(1), pages 123-132, August.
    15. Chen An & Mahayni Antje B., 2008. "Endowment Assurance Products: Effectiveness of Risk-Minimizing Strategies under Model Risk," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 2(2), pages 1-29, March.
    16. Shihao Zhu & Jingtao Shi, 2019. "Optimal Reinsurance and Investment Strategies under Mean-Variance Criteria: Partial and Full Information," Papers 1906.08410, arXiv.org, revised Jun 2020.
    17. Kenichiro Shiraya & Akihiko Takahashi, 2014. "Pricing Basket Options under Local Stochastic Volatility with Jumps," CIRJE F-Series CIRJE-F-913, CIRJE, Faculty of Economics, University of Tokyo.
    18. Thai Nguyen & Mitja Stadje, 2020. "Utility maximization under endogenous pricing," Papers 2005.04312, arXiv.org, revised Mar 2024.
    19. Maroulas, Vasileios & Xiong, Jie, 2013. "Large deviations for optimal filtering with fractional Brownian motion," Stochastic Processes and their Applications, Elsevier, vol. 123(6), pages 2340-2352.
    20. Huang, Jianhui & Wang, Guangchen & Wu, Zhen, 2010. "Optimal premium policy of an insurance firm: Full and partial information," Insurance: Mathematics and Economics, Elsevier, vol. 47(2), pages 208-215, October.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2014cf914. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CIRJE administrative office (email available below). General contact details of provider: https://edirc.repec.org/data/ritokjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.