Please use this identifier to cite or link to this item: https://hdl.handle.net/10356/149141
Title: Mean‐variance hedging with basis risk
Authors: Xue, Xiaole
Zhang, Jingong
Weng, Chengguo
Keywords: Business::Finance
Issue Date: 2019
Source: Xue, X., Zhang, J. & Weng, C. (2019). Mean‐variance hedging with basis risk. Applied Stochastic Models in Business and Industry, 35(3), 704-716. https://dx.doi.org/10.1002/asmb.2380
Journal: Applied Stochastic Models in Business and Industry
Abstract: Basis risk arises in a number of financial and insurance risk management problems when the hedging assets do not perfectly match the underlying asset in a hedging program. Notable examples in insurance include the hedging for longevity risks, weather index–based insurance products, variable annuities, etc. In the presence of basis risk, a perfect hedging is impossible, and in this paper, we adopt a mean‐variance criterion to strike a balance between the expected hedging error and its variability. Under a time‐dependent diffusion model setup, explicit optimal solutions are derived for the hedging target being either a European option or a forward contract. The solutions are obtained by a delicate application of the linear quadratic control theory, the method of backward stochastic differential equation, and Malliavin calculus. A numerical example is presented to illustrate our theoretical results and their interesting implications.
URI: https://hdl.handle.net/10356/149141
ISSN: 1526-4025
DOI: 10.1002/asmb.2380
Rights: This is the peer reviewed version of the following article: Xue, X., Zhang, J. & Weng, C. (2019). Mean‐variance hedging with basis risk. Applied Stochastic Models in Business and Industry, 35(3), 704-716. https://dx.doi.org/10.1002/asmb.2380, which has been published in final form at https://doi.org/10.1002/asmb.2380. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.
Fulltext Permission: open
Fulltext Availability: With Fulltext
Appears in Collections:NBS Journal Articles

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