Bayesian Inference for Optimal Risk Hedging Strategy Using Put Options With Stock Liquidity
This paper considers the problem of hedging the risk exposure to imperfectly liquid stock by investing in put options. In an incomplete market, we firstly obtain a closed-form pricing formula of the European put option with liquidity-adjustment by measure transformation. Then, an optimal hedging str...
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doaj-4be1a298df37447087f8c36fc55d29042021-03-30T00:35:10ZengIEEEIEEE Access2169-35362019-01-01714604614605610.1109/ACCESS.2019.29462608862845Bayesian Inference for Optimal Risk Hedging Strategy Using Put Options With Stock LiquidityRui Gao0Yaqiong Li1https://orcid.org/0000-0001-9591-1082Yanfei Bai2Shanlan Hong3College of Mathematics and Econometrics, Hunan University, Changsha, ChinaCollege of Finance and Statistics, Hunan University, Changsha, ChinaBusiness School, Hunan University, Changsha, ChinaCollege of Mathematics and Econometrics, Hunan University, Changsha, ChinaThis paper considers the problem of hedging the risk exposure to imperfectly liquid stock by investing in put options. In an incomplete market, we firstly obtain a closed-form pricing formula of the European put option with liquidity-adjustment by measure transformation. Then, an optimal hedging strategy which minimizes the Value-at-Risk (VaR) of the hedged portfolio is deduced by determining an optimal strike price for the put option. Furthermore, we provide a new perspective to estimate parameters entering the minimal VaR, since the likelihood function is analytically intractable. A Bayesian statistical method is proposed to perform posterior inference on the minimal VaR and the optimal strike price. Empirical results show that the risk hedging strategy with liquidity-adjustment differs from the hedging strategy based on Black-Scholes model. The effect of the stock liquidity on risk hedging strategy is significant. These results can provide more decision information for institutions and investors with different risk preferences to avoid risk.https://ieeexplore.ieee.org/document/8862845/Stock liquidityincomplete marketrisk hedgingoption pricingminimizing value-at-riskBayesian statistical inference |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Rui Gao Yaqiong Li Yanfei Bai Shanlan Hong |
spellingShingle |
Rui Gao Yaqiong Li Yanfei Bai Shanlan Hong Bayesian Inference for Optimal Risk Hedging Strategy Using Put Options With Stock Liquidity IEEE Access Stock liquidity incomplete market risk hedging option pricing minimizing value-at-risk Bayesian statistical inference |
author_facet |
Rui Gao Yaqiong Li Yanfei Bai Shanlan Hong |
author_sort |
Rui Gao |
title |
Bayesian Inference for Optimal Risk Hedging Strategy Using Put Options With Stock Liquidity |
title_short |
Bayesian Inference for Optimal Risk Hedging Strategy Using Put Options With Stock Liquidity |
title_full |
Bayesian Inference for Optimal Risk Hedging Strategy Using Put Options With Stock Liquidity |
title_fullStr |
Bayesian Inference for Optimal Risk Hedging Strategy Using Put Options With Stock Liquidity |
title_full_unstemmed |
Bayesian Inference for Optimal Risk Hedging Strategy Using Put Options With Stock Liquidity |
title_sort |
bayesian inference for optimal risk hedging strategy using put options with stock liquidity |
publisher |
IEEE |
series |
IEEE Access |
issn |
2169-3536 |
publishDate |
2019-01-01 |
description |
This paper considers the problem of hedging the risk exposure to imperfectly liquid stock by investing in put options. In an incomplete market, we firstly obtain a closed-form pricing formula of the European put option with liquidity-adjustment by measure transformation. Then, an optimal hedging strategy which minimizes the Value-at-Risk (VaR) of the hedged portfolio is deduced by determining an optimal strike price for the put option. Furthermore, we provide a new perspective to estimate parameters entering the minimal VaR, since the likelihood function is analytically intractable. A Bayesian statistical method is proposed to perform posterior inference on the minimal VaR and the optimal strike price. Empirical results show that the risk hedging strategy with liquidity-adjustment differs from the hedging strategy based on Black-Scholes model. The effect of the stock liquidity on risk hedging strategy is significant. These results can provide more decision information for institutions and investors with different risk preferences to avoid risk. |
topic |
Stock liquidity incomplete market risk hedging option pricing minimizing value-at-risk Bayesian statistical inference |
url |
https://ieeexplore.ieee.org/document/8862845/ |
work_keys_str_mv |
AT ruigao bayesianinferenceforoptimalriskhedgingstrategyusingputoptionswithstockliquidity AT yaqiongli bayesianinferenceforoptimalriskhedgingstrategyusingputoptionswithstockliquidity AT yanfeibai bayesianinferenceforoptimalriskhedgingstrategyusingputoptionswithstockliquidity AT shanlanhong bayesianinferenceforoptimalriskhedgingstrategyusingputoptionswithstockliquidity |
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