Barrieu, Pauline, Bellamy, Nadine and Sahut, Jean-Michel (2012) Assessing the costs of protection in a context of switching stochastic regimes. Applied Mathematical Finance, 19 (6). pp. 495-511. ISSN 1350-486X
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Abstract
We consider the problem of cost assessment in the context of switching stochastic regimes. The dynamics of a given asset include a background noise, described by a Brownian motion and a random shock, the impact of which is characterized by changes in the coefficient diffusions. A particular economic agent that is directly exposed to variations in the underlying asset price, incurs some costs, , when the underlying asset price reaches a certain threshold, L. Ideally, the agent would make advance provision, or hedge, for these costs at time 0. We evaluate the amount of provision, or the hedging premium, , for these costs in the disrupted environment, with changes in the regime for a given time horizon, and analyse the sensitivity of this amount to possible model misspecifications.
| Item Type: | Article |
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| Official URL: | http://www.tandfonline.com/loi/ramf20 |
| Additional Information: | © 2012 Taylor & Francis |
| Library of Congress subject classification: | H Social Sciences > HG Finance Q Science > QA Mathematics |
| Sets: | Departments > Statistics Research centres and groups > Centre for the Analysis of Time Series (CATS) Research centres and groups > Risk and Stochastics Group |
| Date Deposited: | 09 Mar 2012 16:25 |
| URL: | http://eprints.lse.ac.uk/42431/ |
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