Related papers: A Utility Based Approach to Energy Hedging
An investor with constant absolute risk aversion trades a risky asset with general It\^o-dynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the…
We construct an utility-based dynamic asset pricing model for a limit order market. The price is nonlinear in volume and subject to market impact. We solve an optimal hedging problem under the market impact and derive the dynamics of the…
We revisit Machina's local utility as a tool to analyze attitudes to multivariate risks. We show that for non-expected utility maximizers choosing between multivariate prospects, aversion to multivariate mean preserving increases in risk is…
Consider an investor trading dynamically to maximize expected utility from terminal wealth. Our aim is to study the dependence between her risk aversion and the distribution of the optimal terminal payoff. Economic intuition suggests that…
This work derives an approximate analytical single period solution of the portfolio choice problem for the power utility function. It is possible to do so if we consider that the asset returns follow a multivariate normal distribution. It…
In modern portfolio theory, the balancing of expected returns on investments against uncertainties in those returns is aided by the use of utility functions. The Kelly criterion offers another approach, rooted in information theory, that…
We study the problem of maximising terminal utility for an agent facing model uncertainty, in a frictionless discrete-time market with one safe asset and finitely many risky assets. We show that an optimal investment strategy exists if the…
This note will extend the research presented in Brown & Rogers (2009) to the case of CRRA agents. We consider the model outlined in that paper in which agents had diverse beliefs about the dividends produced by a risky asset. We now assume…
The paper investigates quadratic hedging in a semimartingale market that does not necessarily contain a risk-free asset. An equivalence result for hedging with and without numeraire change is established. This permits direct computation of…
We revisit the problem of portfolio selection, where an investor maximizes utility subject to a risk constraint. Our framework is very general and accommodates a wide range of utility and risk functionals, including non-concave utilities…
This paper analyzes a problem of optimal static hedging using derivatives in incomplete markets. The investor is assumed to have a risk exposure to two underlying assets. The hedging instruments are vanilla options written on a single…
In a continuous-time model with multiple assets described by c\`{a}dl\`{a}g processes, this paper characterizes superhedging prices, absence of arbitrage, and utility maximizing strategies, under general frictions that make execution prices…
An analytical solution to single-horizon asset allocation for an investor with a piecewise-linear utility function, called herein the "budget threshold utility," and exogenous position limits is presented. The resulting functional form has…
In a market with a rough or Markovian mean-reverting stochastic volatility there is no perfect hedge. Here it is shown how various delta-type hedging strategies perform and can be evaluated in such markets in the case of European options. A…
This paper discusses an alternative explanation for the empirical findings contradicting the positive relationship between risk (variance) and reward (expected return). We show that these contradicting results might be due to the false…
We derive the price of a spread option based on two assets which follow a bivariate volatility modulated Volterra process dynamics. Such a price dynamics is particularly relevant in energy markets, modelling for example the spot price of…
Natural hedging allows life insurers to manage longevity risk internally by offsetting the opposite exposures of life insurance and annuity liabilities. Although many studies have proposed natural hedging strategies under different…
We reveal a geometric structure underlying both hedging and investment products. The structure follows from a simple formula expressing investment risks in terms of returns. This informs optimal product designs. Optimal pure hedging…
The expected utility operators introduced in a previous paper, offer a framework for a general risk aversion theory, in which risk is modelled by a fuzzy number $A$. In this paper we formulate a coinsurance problem in the possibilistic…
Prediction markets are long known for prediction accuracy. This study systematically explores the fundamental properties of prediction markets, addressing questions about their information aggregation process and the factors contributing to…