Hedging under generalized good-deal bounds and model uncertainty

Dirk Becherer and Klebert Kentia

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Abstract: We study a notion of good-deal hedging, that corresponds to good-deal valuation for generalized good-deal constraints. Under model uncertainty about the market prices of risk of hedging assets, a robust approach leads to a reduction or even elimination of a speculative component in good-deal hedging, which is shown to be equivalent to a global risk-minimization in the sense of F\"ollmer and Sondermann (1986) if uncertainty is sufficiently large. Constructive results on hedges and valuations are derived from backward stochastic differential equations, including new examples with explicit formulas.

Date: 2016-07, Revised 2017-04
New Economics Papers: this item is included in nep-rmg
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Published in Math Meth Oper Res (2017), 86/1, 171-214

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1607.04488

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