Local risk minimization for vulnerable European contingent claims on nontradable assets under regime switching models

Wang, Wei; Jin, Zhuo; Qian, Linyi; Su, Xiaonan

doi:10.1080/07362994.2016.1166061

Cited by 8 publications

(7 citation statements)

References 19 publications

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“…Henriksen and Møller [13] considered the criterion of local risk-minimization for life insurance contracts in a financial market, which included longevity bonds. Furthermore, the local risk-minimization method was also applied to defaultable claims in Biagini and Cretarola [4], Okhrati et al [20] and Wang et al [30].…”

Section: Introductionmentioning

confidence: 99%

“…About the hedging with basis risk, Davis [7] addressed the problem using a utility maximization approach and Zhang et al [34] and Xue et al [32] adopted the mean-variance criterion to evaluate the hedging performance, where risky assets were described by geometric Brownian motions. Some related works can be referred to Bajo et al [1], Wang et al [30], Yu et al [33] and among many others.…”

Section: Introductionmentioning

confidence: 99%

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Locally Risk-Minimizing Hedging for European Contingent Claims Written on Non-Tradable Assets With Common Jump Risk

Xing

Wang³

et al. 2021

Prob. Eng. Inf. Sci.

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This article investigates the optimal hedging problem of the European contingent claims written on non-tradable assets. We assume that the risky assets satisfy jump diffusion models with a common jump process which reflects the correlated jump risk. The non-tradable asset and jump risk lead to an incomplete financial market. Hence, the cross-hedging method will be used to reduce the potential risk of the contingent claims seller. First, we obtain an explicit closed-form solution for the locally risk-minimizing hedging strategies of the European contingent claims by using the Föllmer–Schweizer decomposition. Then, we consider the hedging for a European call option as a special case. The value of the European call option under the minimal martingale measure is derived by the Fourier transform method. Next, some semi-closed solution formulae of the locally risk-minimizing hedging strategies for the European call option are obtained. Finally, some numerical examples are provided to illustrate the sensitivities of the optimal hedging strategies. By comparing the optimal hedging strategies when the underlying asset is a non-tradable asset or a tradable asset, we find that the liquidity risk has a significant impact on the optimal hedging strategies.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Locally Risk-Minimizing Hedging for European Contingent Claims Written on Non-Tradable Assets With Common Jump Risk

Xing

Wang³

et al. 2021

Prob. Eng. Inf. Sci.

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“…Various authors assumed regime switching models and addressed theoretical option pricing and portfolio optimization problems following Di Masi et al (1995). For details, the readers may refer to Basak et al (2011), Bo et al (2010), Fan et al (2014), Jobert and Rogers (2006), Li and Ma (2013), Lian et al (2016), Papin and Turinici (2014), Siu et al (2008), Su et al (2012), Swishchuk et al (2014), Wang et al (2016) and Yuen and Yang (2009). This list is merely indicative and not exhaustive by any means.…”

Section: Introductionmentioning

confidence: 99%

Testing of binary regime switching models using squeeze duration analysis

Das

Goswami

2019

J. Finan. Eng.

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We have developed a statistical technique to test the model assumption of binary regime switching extension of the geometric Brownian motion (GBM) model by proposing a new discriminating statistics. Given a time series data, we have identified an admissible class of the regime switching candidate models for the statistical inference. By performing several systematic experiments, we have successfully shown that the sampling distribution of the test statistics differs drastically, if the model assumption changes from GBM to Markov modulated GBM, or to semi-Markov modulated GBM. Furthermore, we have implemented this statistics for testing the regime switching hypothesis with Indian sectoral indices.

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“…Frey and Schmidt (2012) also employ the risk-minimization approach, but assume conditionally independent default times whose intensities depend on an unobservable stochastic factor. Other related studies on quadratic hedging approaches to credit risk modeling include Okhrati et al (2014) who employ structural default models, and Wang et al (2016) who consider vulnerable European contingent claims.…”

Section: Introductionmentioning

confidence: 99%

Risk-Minimizing Hedging of Counterparty Risk

Bo,

Capponi,

Ceci

2017

Preprint

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We study dynamic hedging of counterparty risk for a portfolio of credit derivatives. Our empirically driven credit model consists of interacting default intensities which ramp up and then decay after the occurrence of credit events. Using the Galtchouk-Kunita-Watanabe decomposition of the counterparty risk price payment stream, we recover a closed-form representation for the risk minimizing strategy in terms of classical solutions to nonlinear recursive systems of Cauchy problems. We discuss applications of our framework to the most prominent class of credit derivatives, including credit swap and risky bond portfolios, as well as first-to-default claims.

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Local risk minimization for vulnerable European contingent claims on nontradable assets under regime switching models

Cited by 8 publications

References 19 publications

Locally Risk-Minimizing Hedging for European Contingent Claims Written on Non-Tradable Assets With Common Jump Risk

Locally Risk-Minimizing Hedging for European Contingent Claims Written on Non-Tradable Assets With Common Jump Risk

Testing of binary regime switching models using squeeze duration analysis

Risk-Minimizing Hedging of Counterparty Risk

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