Dynamic Hedging with Stochastic Differential Utility

Dynamic Hedging with Stochastic Differential Utility*

In this paper we study the dynamic hedging problem using three different utility specifications: stochastic differential utility, terminal wealth utility, and a new utility transformation which includes features from the two previous approaches. In all three cases, we assume Markovian prices. While stochastic differential utility (SDU) has an ambiguous effect on the pure hedging demand, it does...

Asset Pricing with Stochastic Differential Utility

Cross hedging with stochastic correlation

This paper is concerned with the study of quadratic hedging of contingent claims with basis risk. We extend existing results by allowing the correlation between the hedging instrument and the underlying of the contingent claim to be random itself. We assume that the correlation process ρ evolves according to a stochastic differential equation with values between the boundaries −1 and 1. We keep...

Mean-Variance Hedging and Forward-Backward Stochastic Differential Filtering Equations

and Applied Analysis 3 objective is min J v · ;x0 subject to v · ∈ Uad, x · ;v · satisfies 1.3 or 1.4 . PIMV The above problem formulates a mean-variance hedging problem with partial information. For simplicity, hereinafter we denote it by the notation “Problem PIMV ”, short for the “partial information mean-variance hedging problem”. In particular, if we let Ft Zt, 0 ≤ t ≤ T , then Problem PIM...

Backward Stochastic Differential Equation on Hedging American Contingent Claims

We consider a general wealth process with a drift coefficient which is a function of the wealth process and the portfolio process with convex constraint. Existence and uniqueness of a minimal solution are established. We convert the problem of hedging American contingent claims into the problem of minimal solution of backward stochastic differential equation, and obtain the upper hedging price ...