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

ShinIchi Aihara; Arunabha Bagchi; Suresh K. Kumar

doi:10.1007/s00245-014-9248-2

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

ShinIchi Aihara, Arunabha Bagchi, Suresh K. Kumar

Research output: Contribution to journal › Article › Academic › peer-review

5 Downloads (Pure)

Abstract

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 language	Undefined
Pages (from-to)	511-537
Number of pages	27
Journal	Applied mathematics and optimization
Volume	70
Issue number	3
DOIs	https://doi.org/10.1007/s00245-014-9248-2
Publication status	Published - Dec 2014

Keywords

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

Access to Document

10.1007/s00245-014-9248-2

http://eprints.eemcs.utwente.nl/secure2/25503/01/JAMO_2014_ABK.pdf

Cite this

@article{9aba9aef9e8c45f38e0d3670e16ce94b,

title = "On Mean-Variance Hedging of Bond Options with Stochastic Risk Premium Factor",

abstract = "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.",

keywords = "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",

author = "ShinIchi Aihara and Arunabha Bagchi and Kumar, {Suresh K.}",

note = "eemcs-eprint-25503 ",

year = "2014",

month = dec,

doi = "10.1007/s00245-014-9248-2",

language = "Undefined",

volume = "70",

pages = "511--537",

journal = "Applied mathematics and optimization",

issn = "0095-4616",

publisher = "Springer",

number = "3",

}

TY - JOUR

T1 - On Mean-Variance Hedging of Bond Options with Stochastic Risk Premium Factor

AU - Aihara, ShinIchi

AU - Bagchi, Arunabha

AU - Kumar, Suresh K.

N1 - eemcs-eprint-25503

PY - 2014/12

Y1 - 2014/12

N2 - 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.

AB - 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.

KW - MSC-60H15

KW - MSC-91G20

KW - MSC-91G80

KW - Stochastic risk premium

KW - EWI-25503

KW - IR-93657

KW - Indifference price

KW - Mean-variance hedging

KW - Kalman filter

KW - METIS-309776

KW - Infinite-dimensional HMJ

U2 - 10.1007/s00245-014-9248-2

DO - 10.1007/s00245-014-9248-2

M3 - Article

SN - 0095-4616

VL - 70

SP - 511

EP - 537

JO - Applied mathematics and optimization

JF - Applied mathematics and optimization

IS - 3

ER -