Template-Type: ReDIF-Paper 1.0
Title: An Examination of the Effects of Parameter Misspecification 
Author-Name: Antje Dudenhausen
Author-Name: Lutz Schlögl
Author-Email: 
Classification-JEL: E43, G12, G13
Keywords: Model misspecification, duplication of bonds, volatility mismatch, optimal selection of hedging instruments
Abstract: It is well-known that Gaussian hedging strategies are robust in the sense that they always lead to a cost process of bounded variation and that a superhedge is
	possible if upper bounds on the volatility of the relevant processes are available, cf. El Karoui, Jeanblanc-Picque and Shreve (1998) and in particular for 
	applications to fixed income derivatives Dudenhausen, Schlögl and Schlögl (1998). These results crucially depend on the choice of certain ``natural'' hedge 
	instruments which are not always available in the market and fail to hold otherwise. In this paper, the problem of optimally selecting hedging instruments from a 
	given set of traded assets, in particular of zero coupon bonds, is studied. Misspecified hedging strategies lead to a non-vanishing cost process, which in turn 
	depends on the particular choice of instruments. The effect of this choice on the cost process is analyzed. Referring to bond markets, a thorough study of the 
	implications of volatility mismatching is made and explicit results are stated for a broad range of volatility scenarios. 
Note: 
Length: 19
Creation-Date: 2002-09	
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse22_2002.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse22_2002