Beyond replication: Hedging in markets with frictions

Market frictions are an essential topic in mathematical finance for industry and academic research. Broadly, the various kinds of frictions may be classified by the following categories (a) transaction costs, (b) trading constraints, (c) non tradable assets, (d) taxes and regulations, (e) market impact, illiquidity. All of those cause the idealistic assumptions of standard models to break down, rendering a perfect elimination of risk impossible. This gave rise to different notions for risk-minimizing optimal (partial) hedging, and new developments on risk measures, where modern research focuses on questions of dynamic time and market consistency. Since every model in mathematical finance is wrong , in that it is at best a sensible approximation to financial market behavior when used appropriately, a practically relevant cause for mis-hedging/valuation is (f) model uncertainly which can be seen as risk outside the model that applies for all, even complete models. One approach to this is not to assign a single valuation but an appropriate good deal valuation range. The aim of this project is to develop suitable notions for hedging in incomplete markets with a focus on friction of type (a,b,f), to contribute to the solutions for hedging problems under model uncertainty, (non-linear) transaction costs, or constraints.

Principal Investigators
Becherer, Dirk Prof. Dr. (Details) (Research Centre 86 'Mathematics for Key Technologies: Modelling / Simulation and Optimization of Real-World Processes')

Duration of Project
Start date: 01/2008
End date: 05/2014


Last updated on 2020-20-03 at 23:08