On Mean-Variance Hedging of Bond Options with Stochastic Risk Premium Factor

We consider the mean-variance hedging problem for pricing bond options using the yield curve as the observation. The model considered contains infinite-dimensional noise sources with the stochastically- varying risk premium. Hence our model is incomplete. We consider mean-variance hedging under the...

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Bibliographic Details
Published inApplied mathematics & optimization Vol. 70; no. 3; pp. 511 - 537
Main Authors Aihara, Shin Ichi, Bagchi, Arunabha, Kumar, Suresh K.
Format Journal Article
LanguageEnglish
Published Boston Springer US 01.12.2014
Springer Nature B.V
Subjects
Applied mathematics
Bond markets
Bonding
Bonds
Brownian motion
Calculus of Variations and Optimal Control; Optimization
Control
Hedging
Market prices
Mathematical and Computational Physics
Mathematical Methods in Physics
Mathematical models
Mathematics
Mathematics and Statistics
Noise
Numerical and Computational Physics
Optimization
Pricing
Probability theory
Risk
Risk premiums
Simulation
Stochastic models
Strategy
Studies
Systems Theory
Theoretical
Yield curve
Mean-variance hedging
Infinite-dimensional HMJ
Kalman filter
Stochastic risk premium
91G20
Indifference price
91G80
60H15
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Summary:We consider the mean-variance hedging problem for pricing bond options using the yield curve as the observation. The model considered contains infinite-dimensional noise sources with the stochastically- varying risk premium. Hence our model is incomplete. We consider mean-variance hedging under the real world measure and obtain an explicit form of the optimal hedging strategy.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
ObjectType-Feature-2
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ISSN:0095-4616
1432-0606
DOI:10.1007/s00245-014-9248-2