This paper examines whether and how the popularity of portfolio insurance strategies can be justified theoretically. The analysis employs three different return generating processes with and without stochastic volatility and jumps. We find that an investor with constant relative risk aversion...

It has been shown that investors can benefit from including derivatives into their portfolios. For retail investors, however, a direct investment in derivatives is often too complicated. Investment certificates offer a potential solution to this problem. We analyze if retail investors who buy...

Model mis-specification can cause substantial utility losses in portfolio planning. In this paper, we compare two approaches to cope with this problem, robust control and learning. We derive the optimal portfolio strategies and the utility losses due to model mis-specification. Surprisingly,...

Model mis-specification can cause substantial utility losses in portfolio planning. In this paper, we compare two approaches to cope with this problem, robust control and learning. We derive the optimal portfolio strategies and the utility losses due to model mis-specification. Surprisingly,...

In an uncertain volatility model where only the stock and the money market account are traded, the upper price bound of a European claim is given by the solution of a Black-Scholes-Barenblatt equation. If an additional hedge instrument is available, the price bound can be tightened. This is also...

In this paper we study the equilibrium in a heterogeneous economy with two groups of investors. Over-confident experts incorrectly assume that their signal for the drift of the dividend process is correlated with the true drift, but interpret the signal otherwise perfectly. Rational laymen avoid...

Variance contracts permit the trading of 'variance risk', i.e. the risk that the (squared) volatility of stock returns changes randomly over time. We discuss why investors might want to trade this type of risk, and why they might prefer a variance contract to standard calls and puts for this...

This paper deals with the superhedging of derivatives on incomplete markets, i.e. with portfolio strategies which generate payoffs at least as high as that of a given contingent claim. The simplest solution to this problem is in many cases a static superhedge, i.e. a buy-and-hold strategy...

The vast majority of approaches to risk management, hedging, or portfolio planning assume that some model is given. However, under model risk, the true data generating process is not known. The focus of this paper is on problems related to the hedging of derivative contracts. We explain the main...

This paper provides an in-depth analysis of the properties of popular tests for the existence and the sign of the market price of volatility risk. These tests are frequently based on the fact that for some option pricing models under continuous hedging the sign of the market price of volatility...