We present a high-frequency based method for analyzing a one-period futures hedging problem. The realized hedge ratio is constructed by applying the realized regression with the R-squared coefficient as an ex-post performance measure. The asymptotic theory enables us to assess the parameter estimation risk of the hedge ratios. An empirical study is conducted on the S&P 500 index and their hedgi...

We develop an integrated simulation and optimization framework for multicurrency asset allocation problems. The simulation applies principal component analysis to generate scenarios depicting the discrete joint distributions of uncertain asset returns and exchange rates. We then develop and implement models that optimize the conditional-value-at-risk (CVaR) metric. The scenario-based optimizati...

A reservoir operation model of Mun Bon and Lam Chae reservoirs was developed to simulate reservoir operation using a hedging policy. A variety of common hedging forms was specified, including one-point hedging, two-point hedging and zone-based hedging. The simulated results were compared with the standard operating policy and probability based rule curve. The percentage of failure frequency, av...

This paper investigates the hedging effectiveness of the Standard & Poor’s (S&P) 500 stock index futures contract using weekly settlement prices for the period July 3, 1992 to June 30, 2002. Particularly, it focuses on three areas of interest: the determination of the appropriate model for estimating a hedge ratio that minimizes the variance of returns; the hedging effectiveness and the stabili...

We consider the hedging of options when the price of the underlying asset is always exposed to the possibility of jumps of random size. Working in a single factor Markovian setting, we derive a new spanning relation between a given option and a continuum of shorter-term options written on the same asset. In this portfolio of shorter-term options, the portfolio weights do not vary with the under...

We investigate daily robust hedging performance with trading costs for markets of S&P 500 Index option (SPX) and Taiwan Index option (TXO). Robust hedging refers to minimal model dependence on the risky asset price. Two hedging categories including " model-free " and " volatility-model-free, " and nonparametric methods for volatility estimation are considered in our empirical study. In particul...

The purpose of this paper is to investigate the use of Principal Component Analysis in finding the efficient subset of underlying assets for hedging European basket options. This asset selection technique can be used together with other hedging strategies to enhance the hedging performance. Meanwhile, it become practical and essential when some of the underlying assets are illiquid or even not ...

In this paper we study the hedging of derivatives in illiquid markets. More specifically we consider a model where the implementation of a hedging strategy affects the price of the underlying security. Following earlier work we characterize perfect hedging strategies by a nonlinear version of the Black-Scholes PDE. The core of the paper consists of a simulation study. We present numerical resul...

In this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility. Extensive research has clearly demonstrated that the volatility of most stocks is not constant over time. As small changes of the volatility can have a major impact on the value of contingent claims, hedging strategies should try to eliminate this volatility risk. We ...

Although model reference adaptive control has been used in numerous applications to achieve system performance without excessive reliance on dynamical system models, the presence of actuator dynamics can seriously limit the stability and the achievable performance of adaptive controllers. In this paper, an linear matrix inequalities-based hedging approach is developed and evaluated for model re...