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

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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

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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.",

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KW - MSC-91G80

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KW - Kalman filter

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