Skip to main content
Article thumbnail
Location of Repository

Marginal utility-based hedging of claims on non-traded assets with partial information

By Michael Monoyios

Abstract

We examine optimal hedging of a claim on a non-traded asset, using a correlated traded asset, when one does not know with certainty the values of the asset price drifts. In this partial information setting, the uncertain parameters are considered as random variables. We filter the drifts from price observations, updating a chosen prior distribution. The result is an effective full information model with random drift parameters. Using a dual approach, we derive representations for the indifference price and optimal hedging strategy, with exponential utility. Using the marginal utility-based price as an approximation to the indifference price, analytic formulae for the optimal hedge are possible, and this allows a simulation study of the optimal hedging program to be carried out. The results indicate improved hedging performance relative to a Black-Scholes strategy which takes the correlation as perfect, and also relative to a utility-based hedging program which does not incorporate learning

Topics: Game theory, mathematical finance, economics, social and behavioral sciences, Probability theory and stochastic processes
Year: 2008
OAI identifier: oai:generic.eprints.org:723/core69

Suggested articles

Citations

  1. (2008). A
  2. (2008). A and LandeĀ“n C
  3. (2005). A PDE representation of the density of the minimal entropy martingale measure in stochastic volatility markets Stochastics An
  4. (2004). An example of indifference prices under exponential preferences Finance
  5. (2007). Asymptotic analysis of utility-based hedging strategies for small number of contingent claims Stochastic Processes and their
  6. (2002). Exponential hedging and entropic penalties
  7. (1997). H A
  8. (2008). Imkeller P and Popier A
  9. (1969). Lifetime portfolio selection under uncertainty: the continuous-time case Rev.
  10. (1991). Martingale and duality methods for utility maximization in an incomplete market
  11. (2001). Mean-variance hedging for partially observed drift processes
  12. (2005). Mean-variance portfolio choice: Quadratic partial hedging doi
  13. (2007). Mean-variance portfolio selection under partial information doi
  14. (2002). On the optimal portfolio for the exponential utility maximization: remarks to the six-author paper
  15. (2007). Optimal hedging an parameter uncertainty
  16. (2001). Optimal investment in incomplete markets when wealth may become negative
  17. (2008). Optimal investment with an unbounded random endowment and utility-based pricing Mathematical Finance,
  18. (1998). Optimal trading strategy for an investor: the case of partial information
  19. (1971). Optimum consumption and portfolio rules in a continuous-time model
  20. (2004). Performance of utility-based strategies for hedging basis risk Quantitative Finance
  21. (2006). Portfolio selection under incomplete information Stochastic processes and their
  22. (2007). Pricing and hedging in the presence of extraneous risks Stochastic Processes and their
  23. (2006). Pricing commodity derivatives with basis risk and partial observations, preprint
  24. (2002). Risk-sensitive dtnamic portfolio optimization with partial information on infinite time horizon
  25. (2002). Smooth solutions to optimal investment models with stochastic volatilities and portfolio constraints
  26. (1999). The asymptotic elasticity of utility functions and optimal investment in incomplete markets
  27. (2001). The relaxed investor and parameter uncertainty Finance
  28. (1998). The role of learning in dynamic portfolio decisions
  29. (1995). Utility maximization with partial information
  30. (2004). Utility-indifference hedging and valuation via reaction-diffusion systems
  31. (2002). Valuation of claims on nontraded assets using utility maximization

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.