Hedging for the long run

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dc.contributor.author Hulley, Hardy en_US
dc.contributor.author Platen, Eckhard en_US
dc.contributor.editor en_US
dc.date.accessioned 2012-10-12T03:32:44Z
dc.date.available 2012-10-12T03:32:44Z
dc.date.issued 2012 en_US
dc.identifier 2011004673 en_US
dc.identifier.citation Hulley Hardy and Platen Eckhard 2012, 'Hedging for the long run', Springer, vol. 6, no. 2, pp. 105-124. en_US
dc.identifier.issn 1862-9679 en_US
dc.identifier.other C1 en_US
dc.identifier.uri http://hdl.handle.net/10453/17898
dc.description.abstract In the years following the publication of Black and Scholes (J Political Econ, 81(3), 637-654, 1973), numerous alternative models have been proposed for pricing and hedging equity derivatives. Prominent examples include stochastic volatility models, jump-diffusion models, and models based on Levy processes. These all have their own shortcomings, and evidence suggests that none is up to the task of satisfactorily pricing and hedging extremely long-dated claims. Since they all fall within the ambit of risk-neutral valuation, it is natural to speculate that the deficiencies of these models are (at least in part) attributable to the constraints imposed by the risk-neutral approach itself. To investigate this idea, we present a simple two-parameter model for a diversified equity accumulation index. Although our model does not admit an equivalent risk-neutral probability measure, it nevertheless fulfils a minimal no-arbitrage condition for an economically viable financial market. Furthermore, we demonstrate that contingent claims can be priced and hedged, without the need for an equivalent change of probability measure. Convenient formulae for the prices and hedge ratios of a number of standard European claims are derived, and a series of hedge experiments for extremely long-dated claims on the S&P 500 total return index are conducted. Our model serves also as a convenient medium for illustrating and clarifying several points on asset price bubbles and the economics of arbitrage. en_US
dc.language en_US
dc.publisher Springer en_US
dc.relation.isbasedon http://dx.doi.org/10.1007/s11579-012-0072-7 en_US
dc.title Hedging for the long run en_US
dc.parent Mathematics and Financial Economics en_US
dc.journal.volume 6 en_US
dc.journal.number 2 en_US
dc.publocation Germany en_US
dc.identifier.startpage 105 en_US
dc.identifier.endpage 124 en_US
dc.cauo.name BUS.Finance en_US
dc.conference Verified OK en_US
dc.for 010200 en_US
dc.personcode 040635 en_US
dc.personcode 970685 en_US
dc.percentage 50 en_US
dc.classification.name Applied Mathematics en_US
dc.classification.type FOR-08 en_US
dc.edition en_US
dc.custom en_US
dc.date.activity en_US
dc.location.activity en_US
dc.description.keywords Arbitrage; Asset price bubbles; Hedge simulations; Long-dated claims; Minimal market model; Real-world valuation; Risk-neutral valuation; Squared Bessel processes en_US
dc.staffid en_US
dc.staffid 970685 en_US


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