Monoyios, Michael (2008) *Marginal utility-based hedging of claims on non-traded assets with partial information.* preprint . (Submitted)

| PDF 294Kb |

## 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.

Item Type: | Article |
---|---|

Subjects: | D - G > Game theory, mathematical finance, economics, social and behavioral sciences O - Z > Probability theory and stochastic processes |

Research Groups: | Mathematical and Computational Finance Group |

ID Code: | 723 |

Deposited By: | Professor Michael Monoyios |

Deposited On: | 01 Aug 2008 |

Last Modified: | 20 Jul 2009 14:23 |

Repository Staff Only: item control page