|
EconStor >
Rheinische Friedrich-Wilhelms-Universität Bonn >
Bonn Graduate School of Economics (BGSE), Universität Bonn >
Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/10419/22843
|
| | |
| Title: | | An Examination of the Effects of Parameter Misspecification  |
| Authors: | | Dudenhausen, Antje Schlögl, Lutz |
| Issue Date: | | 2002 |
| Series/Report no.: | | Bonn econ discussion papers 2002,22 |
| Abstract: | | It is well-known that Gaussian hedging strategies are robust in the sense that they always lead to a cost process of bounded variation and that a superhedge is possible if upper bounds on the volatility of the relevant processes are available, cf. El Karoui, Jeanblanc-Picque and Shreve (1998) and in particular for applications to fixed income derivatives Dudenhausen, Schlögl and Schlögl (1998). These results crucially depend on the choice of certain ``natural'' hedge instruments which are not always available in the market and fail to hold otherwise. In this paper, the problem of optimally selecting hedging instruments from a given set of traded assets, in particular of zero coupon bonds, is studied. Misspecified hedging strategies lead to a non-vanishing cost process, which in turn depends on the particular choice of instruments. The effect of this choice on the cost process is analyzed. Referring to bond markets, a thorough study of the implications of volatility mismatching is made and explicit results are stated for a broad range of volatility scenarios. |
| Subjects: | | Model misspecification duplication of bonds volatility mismatch optimal selection of hedging instruments |
| JEL: | | G13 G12 E43 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn
|
| |
| | |
Download bibliographical data as:
BibTeX
|
| |
Share on:http://hdl.handle.net/10419/22843
|
Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.
|