Monoyios, Michael (2008) Marginal utilitybased hedging of claims on nontraded assets with partial information. preprint . (Submitted)

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Abstract
We examine optimal hedging of a claim on a nontraded 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 utilitybased
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 BlackScholes strategy
which takes the correlation as perfect, and also relative to a
utilitybased 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:  29 May 2015 18:27 
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