HEDGING (618325)

  https://cordis.europa.eu/project/id/618325

  FP7 (2007-2013)

  Hedging under Friction and Uncertainty: Theory and Numerics

  Marie-Curie Action: "Career Integration Grants" (FP7-PEOPLE-2013-CIG)

  econometrics  ·  statistics and probability

  2013-11-01 Start Date (YY-MM-DD)

  2017-10-31 End Date (YY-MM-DD)

  € 100,000 Total Cost

  Description

In this project our goal is to deal with a class of hedging and pricing problems which arise in modern Mathematical Finance. These problems are not only interesting from the applications point of view but also provide a good source for new mathematical questions which require new tools in the area of probability theory. We will focus on three main topics: (i) Hedging with Friction. (ii) Robust Hedging. (iii) Numerical Schemes. All the above topics are related to the theory of pricing and hedging of derivative securities. In the last 35 years there was great progress in this direction. By now there is quite a good understanding of pricing and hedging in frictionless financial markets with a known probabilistic structure. This understanding was achieved by developing the machinery of stochastic calculus, stochastic control, martingale theory, hypothesis testing, etc. In real market conditions, it is very difficult to provide a correct probabilistic model for the behavior of stock prices. Furthermore, trading of assets is subject to transaction costs, i.e. there is a gap between an ask price and the bid price. These two facts raise the natural question of understanding hedging in markets with friction and model uncertainty. Usually, when dealing with complex models of financial markets, explicit formulas for option prices and the corresponding super--replication strategies are not available. This is the motivation to study numerical schemes for several stochastic control problems which are related to hedging under volatility uncertainty. In the current project we are interested not only in providing the algorithms of numerical schemes, but also in implementing them. In summary, the proposed questions are not only crucial for the understanding of pricing and hedging in financial markets, but also a great source of new mathematical problems. These problems require new tools and also attract the attention of world class mathematicians.

  Complicit Organisations

1 Israeli organisation participates in HEDGING.