Optimal hedged portfolios: the case of jump-diffusion risks

Park, Keehwan; Ahn, Chang Mo; Fujihara, Roger A.

doi:10.1016/0261-5606(93)90036-b

Cited by 5 publications

(3 citation statements)

References 25 publications

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“…Although they are very attractive because of their statistical properties and computational convenience for theoretical derivation, [1][2][3] and others found evidence indicating the presence of jumps in stock and interest rate processes. Moreover, jump-diffusion processes are particularly important in pricing and hedging financial derivatives because ignoring jumps in financial prices could cause pricing and hedging risks [2].…”

Section: Introductionmentioning

confidence: 99%

The Role of the Risk-Neutral Jump Size Distribution in Single-Factor Interest Rate Models

Gómez-Valle¹,

Martínez-Rodríguez

2015

Abstract and Applied Analysis

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We obtain a result that relates the risk-neutral jump size of interest rates with yield curve data. This function is unobservable; therefore, this result opens a way to estimate the jump size directly from data in the markets together with the risk-neutral drift and jump intensity estimations. Then, we investigate the finite sample performance of this approach with a test problem. Moreover, we analyze the effect of estimating the risk-neutral jump size instead of assuming that it is artificially absorbed by the jump intensity, as usual in the interest rate literature. Finally, an application to US Treasury Bill data is also illustrated.

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Section: Introductionmentioning

confidence: 99%

The Role of the Risk-Neutral Jump Size Distribution in Single-Factor Interest Rate Models

Gómez-Valle¹,

Martínez-Rodríguez

2015

Abstract and Applied Analysis

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“…We contrast the optimal portfolio choice of an investor when the exchange rate is normally distributed and when it is drawn from a mixture of normal distributions. This section is not a full-fledged study of intertemporal asset demand, as in the study of Park, Ahn, and Fujihara (1993) for the jump-diffusion process. It is set in a two-period framework, and is intended to illustrate the importance of the distributional assumption for asset choice.…”

Section: Implications Of Two Distributions For Ems Exchange Ratesmentioning

confidence: 99%

The Distribution of Exchange Rates in the EMS

Engel

Hakkio

1996

Int. J. Fin. Econ.

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and the System Committee on International Economic Analysis provided helpful comments. The material contained herein is of a preliminary nature and is circulated to stimulate discussion. This paper is part of NBER's research program in International Finance and Macroeconomics. Any opinions expressed are those of the authors and not those of the Federal Reserve Bank of Kansas City, the Federal Reserve System, or the National Bureau of Economic Research. C) 1994 by Charles Engel and Craig S. Hakkio. All rights reserved. Short sections of text, not to exceed two paragraphs. may be quoted without explicit permission provided that full credit, including notice, is given to the source. NBER Working Paper #4834

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“… Park et al . () differentiated the jump risk from the diffusion risk in deriving the rules for optimal hedged portfolios and explored some implications along the line of the issue of the time‐varying risk premiums in the foreign exchange market. …”

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confidence: 99%

Risk Premium and Convexity Premium in the Stock Return

Park

Choi²,

Kim

2012

Asia-Pac J of Fin Stud

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We model and estimate equity premium in a general equilibrium setting. It is done by reframing the Merton's model (1974) in the context of general equilibrium models such as Ahn and Thompson (1988) and Bates (1991). Our approach is novel in its attempt to derive equity premium by evaluating the equity returns dynamics in equilibrium and to thereby estimate non‐risk convexity premium for equity as well as its risk premium. While risk premium is generally due to systematic risk, convexity premium is due to the option‐like feature of equity, and exists under returns discontinuity and risk neutrality. We model equity premium such that the convexity premium pays for the liquidity and information costs of equity. We calibrate our equity premium model and report that the convexity premium counts for about one third of our predicted equity premium. We find relevance for our non‐risk convexity premium in relation to the premium puzzle and anomalies in the stock market.

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Optimal hedged portfolios: the case of jump-diffusion risks

Cited by 5 publications

References 25 publications

The Role of the Risk-Neutral Jump Size Distribution in Single-Factor Interest Rate Models

The Role of the Risk-Neutral Jump Size Distribution in Single-Factor Interest Rate Models

The Distribution of Exchange Rates in the EMS

Risk Premium and Convexity Premium in the Stock Return

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