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Assessing the costs of protection in a context of switching stochastic regimes

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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Identification Number: 10.1080/1350486X.2011.642615


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
Official URL:
Additional Information: © 2012 Taylor & Francis
Divisions: Statistics
Centre for Analysis of Time Series
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
Date Deposited: 09 Mar 2012 16:25
Last Modified: 16 May 2024 01:24

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