Three essays on pricing and hedging in incomplete markets.
PhD thesis, The London School of Economics and Political Science (LSE).
The thesis focuses on valuation and hedging problems when the market is incomplete.
The Örst essay considers the quadratic hedging strategy. We propose a generalized
quadratic hedging strategy which can balance a short-term risk (additional cost) with
a long-term risk (hedging errors). The traditional quadratic hedging strategies, i.e.
self-Önancing strategy and risk-minimization strategy, can be seen as special cases of
the generalized quadratic hedging strategy. This is applied to the insurance derivatives
The second essay compares parametric and nonparametric measure-changing techniques. The essay discusses three pricing approaches: pricing via Esscher measure,
via calibration and via nonparametric risk-neutral density; and empirically compares
the performance of the three approaches in the metal futures markets.
The last essay establishes the concept of stochastic volatility of volatility and
proposes several estimation methods.
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