On Mean-Variance Hedging of Bond Options with Stochastic Risk Premium Factor

ShinIchi Aihara, Arunabha Bagchi, Suresh K. Kumar

    Research output: Contribution to journalArticleAcademicpeer-review


    We consider the mean-variance hedging problem for pricing bond options using the yield curve as the observation. The model considered contains infinite-dimensional noise sources with the stochastically- varying risk premium. Hence our model is incomplete. We consider mean-variance hedging under the real world measure and obtain an explicit form of the optimal hedging strategy.
    Original languageUndefined
    Pages (from-to)511-537
    Number of pages27
    JournalApplied mathematics and optimization
    Issue number3
    Publication statusPublished - Dec 2014


    • MSC-60H15
    • MSC-91G20
    • MSC-91G80
    • Stochastic risk premium
    • EWI-25503
    • IR-93657
    • Indifference price
    • Mean-variance hedging
    • Kalman filter
    • METIS-309776
    • Infinite-dimensional HMJ

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