Optimal Dynamic Hedging in Incomplete Futures Markets
This article derives optimal hedging demands for futures contracts from an investor who cannot freely trade his portfolio of primitive assets in the context of either a CARA or a logarithmic utility function. Existing futures contracts are not numerous enough to complete the market. In addition, in the case of CARA, the nonnegativity constraint on wealth is binding, and the optimal hedging demands are not identical to those that would be derived if the constraint were ignored. Fictitiously completing the market, we can characterize the optimal hedging demands for futures contracts. Closed-form solutions exist in the logarithmic case but not in the CARA case, since then a put (insurance) written on his wealth is implicitly bought by the investor. Although solutions are formally similar to those that obtain under complete markets, incompleteness leads in fact to second-best optima. The Geneva Papers on Risk and Insurance Theory (1996) 21, 103–122. doi:10.1007/BF00949052
Year of publication: |
1996
|
---|---|
Authors: | Lioui, Abraham ; Trong, Pascal Nguyen Duc ; Poncet, Patrice |
Published in: |
The Geneva Risk and Insurance Review. - Palgrave Macmillan, ISSN 1554-964X. - Vol. 21.1996, 1, p. 103-122
|
Publisher: |
Palgrave Macmillan |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Optimal dynamic hedging in incomplete futures markets
Lioui, Abraham, (1996)
-
Optimal Dynamic Hedging in Incomplete Futures Markets
Lioui, Abraham, (2010)
-
International Asset Allocation: A New Perspective
Lioui, Abraham, (2001)
- More ...