Working Paper

Hedging and Pricing in Imperfect Markets under Non-Convexity

Abstract: This paper proposes a robust approach to hedging and pricing in the presence of market imperfections such as market incompleteness and frictions. The generality of this framework allows us to conduct an in-depth theoretical analysis of hedging strategies for a wide family of risk measures and pricing rules, which are possibly non-convex. The practical implications of our proposed theoretical approach are illustrated with an application on hedging economic risk.

Keywords: imperfect markets; risk measures; hedging; pricing rule; quantile regressions;

JEL Classification: C22; E44; G11; G13;

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2014-08-01

Number: 2014-13

Pages: 33 pages