In this paper, we consider the problem of mean-variance hedging in an incomplete market where the underlying assets are jump diffusion processes which are driven by Brownian motion and doubly stochastic Poisson processes. This problem is formulated as a stochastic control problem and closed form expressions for the optimal hedging policy are obtained using methods from stochastic control and th...

Although the finance literature has devoted a lot of research into development advanced models for improving pricing and hedging performance, there been much less emphasis on approaches to measure dynamic effectiveness. This article discusses statistical framework based regression analysis effectiveness hedges long-term investment guarantees. The importance taking model risk account is emphasiz...

This article investigates the optimal crop planting schedule and hedging strategy in the mean return versus CVaR risk framework. Crop insurances and futures contracts are available for hedging against yield and price risks. The impact of the ENSO-based climate forecast on the optimal production and hedging decision is examined. Gaussian copula is applied in simulating the scenarios of correlate...

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and infe...

In this paper we study the dynamic hedging problem using three different utility specifications: stochastic differential utility, terminal wealth utility, and a new utility transformation which includes features from the two previous approaches. In all three cases, we assume Markovian prices. While stochastic differential utility (SDU) has an ambiguous effect on the pure hedging demand, it does...

A key question is why many globally active firms forgo foreign exchange hedging despite its low costs. We propose an explanation based on incomplete hedging markets that further suggests that operational hedging is often a more effective hedge. We use 10-K filings to construct text-based measures of financial hedging and three offshore activities: the sale of output, the purchase of input, and ...

The sovereign debt crisis challenged investors in European government bonds to deal with volatile interest rate spreads. For managing sovereign risk, “Eurex” introduced futures contracts on Italian government bonds reflecting risks of lower rated countries. We analyze hedging strategies for bond portfolios with futures on German and Italian government bonds before and during the sovereign debt ...

This paper looks at the development of dynamic hedging strategies for typical pension plan liabilities using longevity-linked hedging instruments. Progress in this area has been hindered by the lack of closed-form formulas for the valuation of mortalitylinked liabilities and assets, and the consequent requirement for simulations within simulations. We propose use of the probit function along wi...

In bet hedging, organisms sacrifice short-term success to reduce the long-term variance in success. Delayed germination is the classic example of bet hedging, in which a fraction of seeds remain dormant as a hedge against the risk of complete reproductive failure. Here, we investigate the adaptive nature of delayed germination as a bet hedging strategy using long-term demographic data on Sonora...