Arbeitspapier
An Examination of the Effects of Parameter Misspecification
It is well-known that Gaussian hedging strategies are robust in the sense that they always lead to a cost process of bounded variation and that a superhedge is possible if upper bounds on the volatility of the relevant processes are available, cf. El Karoui, Jeanblanc-Picque and Shreve (1998) and in particular for applications to fixed income derivatives Dudenhausen, Schlögl and Schlögl (1998). These results crucially depend on the choice of certain ``natural'' hedge instruments which are not always available in the market and fail to hold otherwise. In this paper, the problem of optimally selecting hedging instruments from a given set of traded assets, in particular of zero coupon bonds, is studied. Misspecified hedging strategies lead to a non-vanishing cost process, which in turn depends on the particular choice of instruments. The effect of this choice on the cost process is analyzed. Referring to bond markets, a thorough study of the implications of volatility mismatching is made and explicit results are stated for a broad range of volatility scenarios.
- Sprache
-
Englisch
- Erschienen in
-
Series: Bonn Econ Discussion Papers ; No. 22/2002
- Klassifikation
-
Wirtschaft
Contingent Pricing; Futures Pricing; option pricing
Asset Pricing; Trading Volume; Bond Interest Rates
Interest Rates: Determination, Term Structure, and Effects
- Thema
-
Model misspecification
duplication of bonds
volatility mismatch
optimal selection of hedging instruments
Optionspreistheorie
Hedging
Strategie
Modell-Spezifikation
Theorie
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Dudenhausen, Antje
Schlögl, Lutz
- Ereignis
-
Veröffentlichung
- (wer)
-
University of Bonn, Bonn Graduate School of Economics (BGSE)
- (wo)
-
Bonn
- (wann)
-
2002
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:44 MEZ
Datenpartner
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Objekttyp
- Arbeitspapier
Beteiligte
- Dudenhausen, Antje
- Schlögl, Lutz
- University of Bonn, Bonn Graduate School of Economics (BGSE)
Entstanden
- 2002
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