Option hedging by an influential informed investor

Anne Eyraud‐Loisel

Applied Stochastic Models in Business and Industry, 2011, vol. 27, issue 6, 707-722

Abstract: This work extends the study of hedging problems in markets with asymmetrical information: an agent is supposed to possess an additional information on market prices, unknown to the common investor. The financial hedging problem for the influential and informed trader is modeled by a forward–backward stochastic differential equation, to be solved under an initial enlargement of the Brownian filtration. An existence and uniqueness theorem is proved under standard assumptions. The financial interpretation is derived, in terms of investment strategy for the informed and influential agent, as well as the conclusions concerning the general influenced market, in terms of completeness of the market. An example of such influenced and informed model is provided. Copyright © 2011 John Wiley & Sons, Ltd.

Date: 2011
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https://doi.org/10.1002/asmb.889

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Persistent link: https://EconPapers.repec.org/RePEc:wly:apsmbi:v:27:y:2011:i:6:p:707-722

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