Stochastic regression and its application to hedging in finance

DOI10.1007/S11425-009-0083-XMaRDI QIDQ1042957zbMATH OpenOpenAlexFDO

Authors Zhi Liu, Bo Zhang, Bing-Yi Jing, Xin-Bing Kong

Publication date 7 December 2009

Published in Science in China. Series A (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s11425-009-0083-x

zbMATH Keywords

Itô processsemimartingalesstatistical risk managementstochastic integrals

Mathematics Subject Classification ID

Stochastic integrals (60H05) Linear inference, regression (62J99) Applications of statistics to actuarial sciences and financial mathematics (62P05) Statistical methods; risk measures (91G70) Financial applications of other theories (91G80)

Review text

The authors consider stochastic regression between a stochastic process \(\Xi\), that is the sum of residual noise and stochastic integrals with respect to semimartingales, and these semimartingales. From the financial point of view, semimartingales are considered as price processes of the collection of securities, and \(\Xi\) as the price process of a newly added security. The motivation comes from statistical risk management in financial markets. The purpose of the paper is to investigate how to reduce the remaining unhedgeable risk, measured by the quadratic variation of the residual process. Some practical recommendations are given, how to choose hedging securities.

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• Financial regression and organization
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Cites work

• ANOVA for diffusions and Itō processes
• Non‐parametric Kernel Estimation of the Coefficient of a Diffusion
• On estimating the diffusion coefficient from discrete observations
• Rates of convergence to the local time of a diffusion
• Stochastic Calculus

Cited in

(1)

• Financial regression and organization

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