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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Hedging and Pricing in Imperfect Markets under Non-Convexity
Hirbod Assa
Nikolay Gospodinov
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.


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Hirbod Assa & Nikolay Gospodinov, Hedging and Pricing in Imperfect Markets under Non-Convexity, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2014-13, 01 Aug 2014.
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Keywords: imperfect markets; risk measures; hedging; pricing rule; quantile regression
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