Please use this identifier to cite or link to this item:
Dudenhausen, Antje
Year of Publication: 
Series/Report no.: 
Bonn econ discussion papers 2002,13
The following paper focuses on the incompleteness arising from model misspecification combined with trading restrictions. While asset price dynamics are assumed to be continuous time processes, the hedging of contingent claims occurs in discrete time. The trading strategies under consideration are understood to be self-financing with respect to an assumed model which may deviate from the ``true'' model, thus associating duplication costs with respect to a contingent claim to be hedged. Based on the robustness result of Gaussian hedging strategies, saying that a superhedge is achieved for convex payoff-functions if the ``true'' asset price volatility is dominated by the assumed one, the error of time discretising these strategies is analysed. It turns out that the time discretisation of Gaussian hedges gives rise to a duplication bias caused by asset price trends, which can be avoided by discretising the hedging model instead of discretising the hedging strategies. Additionally it is shown, that on the one hand binomial strategies incorporate similar robustness features as Gaussian hedges. On the other hand, the distribution of the cost process associated with the binomial hedge coincides with the distribution of the cost process associated with the Gaussian hedge in the limit. Together, the last results yield a strong argument in favour of discretising the hedge model instead of time discretising the strategies.
Incomplete markets
model misspecification
trading restrictions
martingale measure
duplication costs
Document Type: 
Working Paper

Files in This Item:

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.