This paper examines a simple basis risk model based on correlated geometric Brownian motions. We apply quadratic criteria to minimize basis risk and hedge in an optimal manner. Initially, we derive the Follmer-Schweizer decomposition of a European claim. This allows pricing and hedging under the...

This paper examines a simple basis risk model based on correlated geometric Brownian motions. We apply quadratic criteria to minimize basis risk and hedge in an optimal manner. Initially, we derive the Föllmer–Schweizer decomposition for a European claim. This allows pricing and hedging under...

In this paper, we deal with the pricing of European style options when the dynamics of the risky underlying asset are driven by a Markov-modulated jump diffusion with stochastic volatility. We investigate the Radon–Nikodym derivative for the minimal martingale measure and a partial...

We develop a structural risk-neutral model for energy market modifying along several directions the approach introduced in Aid et al. (2009). In particular a scarcity function is introduced to allow important deviations of the spot price from the marginal fuel price, producing price spikes. We...

We develop a theory of local risk minimization for payment processes in discrete time, and apply this theory to the pricing and hedging of equity-linked life-insurance contracts. Thus, we extend the work of Møller (2001a) in several directions: from risk minimization (which is done under a...

We propose different schemes for option hedging when asset returns are modeled using a general class of GARCH models. More specifically, we implement local risk minimization and a minimum variance hedge approximation based on an extended Girsanov principle that generalizes Duan׳s (1995) delta...

We develop a structural risk-neutral model for energy market modifying along several directions the approach introduced in Aïd et al. In particular, a scarcity function is introduced to allow important deviations of the spot price from the marginal fuel price, producing price spikes. We focus...

In a frictionless and competitive economy, where high frequency (HF) traders possess no market power, this paper characterizes necessary and sufficient conditions on the price process and information sets for HF traders to earn abnormal trading profits. Two sufficient conditions shown to...

This paper shows that high frequency trading may play a dysfunctional role in financial markets. Contrary to arbitrageurs who make financial markets more efficient by taking advantage of and thereby eliminating mispricings, high frequency traders can create a mispricing that they unknowingly...

We show that in a discrete-time large financial market the absence of certain asymptotic arbitrage opportunities is equivalent to the existence of martingale measures in a strong sense. We also consider the Arbitrage Pricing Model with stable random variables where we are able to give explicit...