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Three essays on pricing and hedging in incomplete markets

Chen, Dan (2011) Three essays on pricing and hedging in incomplete markets. PhD thesis, The London School of Economics and Political Science (LSE).

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Abstract

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 market. 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.

Item Type: Thesis (PhD)
Additional Information: © 2011 Dan Chen
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Statistics
Supervisor: Rheinlander, Thorsten
URI: http://etheses.lse.ac.uk/id/eprint/152

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