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Hedging under incomplete information: applications to emmissions markets

By Umut Cetin and Michel Verschuere


We study a stochastic model for a market with two tradeable assets where the price of the first asset is implied by the value of the second one and the state of a partially ‘hidden’ control process. We derive a closed expression for the value of the first asset, as a function of the price for the second and the most recent observation of the control process. We show how the model can be applied to EU markets for carbon emissions. The 5th Actuarial and Financial Mathematics Day took place on 9 February 2007

Topics: HB Economic Theory, QA Mathematics
Publisher: Koninklijke Vlaamse Academie van Belgie voor Wetenschappen en Kunsten
Year: 2007
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Provided by: LSE Research Online
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