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Title:How to Avoid a Hedging Bias PDF Logo
Authors:Dudenhausen, Antje
Issue Date:2002
Series/Report no.:Bonn econ discussion papers 2002,34
Abstract:In this paper, the effects of so-called model misspecification and the effects of dropping the assumption that continuous rebalancing is possible are examined. Strategies which are robust if applied continuously fail to be robust if applied in discrete time. Therefore, the hedging bias which originates from the effects of time-discretising strategies is analysed. It turns out that a systematic hedging bias can only be avoided if a discrete-time hedging model is used. It is shown how the robustness property for convex payoffs is recovered while at the same time the hedging bias is avoided.
Subjects:Model misspecification
hedging strategies
convex payoffs
superhedging
discrete-time trading
JEL:G12
G13
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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