Hirbod Assa and Nikolay Gospodinov
Working Paper 2014-13
This paper proposes a robust approach to hedging and pricing in the presence of market imperfections such as market incompleteness and frictions. The generality of this framework allows us to conduct an in-depth theoretical analysis of hedging strategies for a wide family of risk measures and pricing rules, which are possibly non-convex. The practical implications of our proposed theoretical approach are illustrated with an application on hedging economic risk.
JEL classification: G11, G13, C22, E44
Key words: imperfect markets, risk measures, hedging, pricing rule, quantile regression
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Please address questions regarding content to Hirbod Assa, Institute for Financial and Actuarial Mathematics, University of Liverpool, Mathematical Sciences Building, Peach Street, Liverpool L69 7ZL, United Kingdom, email@example.com; or Nikolay Gospodinov, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-7892, firstname.lastname@example.org.
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