Inflexible Hedging in the Presence of Illiquidity and Jump Risks

2021 ◽  
Author(s):  
Yuan Gao ◽  
Yuheng Wu ◽  
Mingrui Duan
Keyword(s):  
Jump Risks

Continuous-Time Topics

2017 ◽  
Author(s):  
Kerry E. Back
Keyword(s):  
Portfolio Choice ◽  
Risk Premium ◽  
Cash Flows ◽  
Jump Processes ◽  
Portfolio Risk ◽  
Continuous Part ◽  
Jump Risks ◽  
Complete Market ◽  
Risk Neutral Probabilities ◽  
Premium Puzzle

The fundamental PDE for valuing cash flows or cash flow streams is explained. In a complete market, an investor’s optimal wealth satisfies the fundamental PDE, and this provides a means of calculating the optimal portfolio. Risk neutral probabilities and Girsanov’s theorem are explained. Jump processes, including Poisson processes, are introduced. The risk premium of an asset with jump risks depends on covariation of its continuous part with the continuous part of an SDF and the covariation of its discontinuous part with the discontinuous part of an SDF. Portfolio choice with internal habits is characterized. The ability of a representative investor model with an internal habit to explain the equity premium puzzle is discussed.

The decomposition of jump risks in individual stock returns

2018 ◽  
Vol 47 ◽  
pp. 207-228 ◽  
Author(s):  
Xiao Xiao ◽  
Chen Zhou
Keyword(s):  
Stock Returns ◽  
Jump Risks

scholarly journals Measuring Tail Risks at High Frequency

2018 ◽  
Vol 32 (9) ◽  
pp. 3571-3616 ◽  
Author(s):  
Brian M Weller
Keyword(s):  
Stock Returns ◽  
High Frequency ◽  
Trading Volume ◽  
Extreme Event ◽  
Open Market ◽  
Federal Open Market Committee ◽  
Tail Risk ◽  
Market Risks ◽  
Jump Risks ◽  
Liquidity Shock

Abstract I exploit information in the cross-section of bid-ask spreads to develop a new measure of extreme event risk. Spreads embed tail risk information because liquidity providers require compensation for the possibility of sharp changes in asset values. I show that simple regressions relating spreads and trading volume to factor betas recover this information and deliver high-frequency tail risk estimates for common factors in stock returns. My methodology disentangles financial and aggregate market risks during the 2007–2008 financial crisis; quantifies jump risks associated with Federal Open Market Committee announcements; and anticipates an extreme liquidity shock before the 2010 Flash Crash. Received April 27, 2016; editorial decision August 10, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

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