Optimal hedging strategies for misspecified asset price models

Hyungsok Ahn, Adviti Muni and Glen Swindle

Applied Mathematical Finance, 1999, vol. 6, issue 3, 197-208

Abstract: The Black-Scholes option pricing methodology requires that the model for the price of the underlying asset be completely specified. Often the underlying price is taken to be a geometric Brownian motion with a constant, known volatility. In practice one does not know precise values of parameters such as the volatility, and estimates from historical prices or implied volatilities must be used instead. In this paper optimal hedging strategies are constructed when the volatility of the asset price is misspecified. Optimality refers to maximizing the utility of the investor in a worst-case volatility scenario.

Keywords: Incomplete Markets; Option Hedging Strategies; h Control; Stochastic Differential Games (search for similar items in EconPapers)
Date: 1999
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/135048699334537 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:6:y:1999:i:3:p:197-208

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/135048699334537

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().