With the consideration of the information set at the time t - [tau], we can obtain the following optimal dynamic hedge
ratio by minimizing risk of the hedged portfolio [pi] = [S.sub.t] - [h.sub.t-[tau]][F.sub.t], or d[pi] = d[S.sub.t] - [h.sub.t-[tau]]d[F.sub.t]:
The eleven international contributions that make up the bulk of the text cover model switching and model averaging in time-varying parameter regression models, Bayesian selection of systematic risk networks, factor selection in dynamic hedge
fund replication models, and a variety of other related subjects.
* Q1D: optimal dynamic hedge
ratios [H.sub.1](t), ..., [H.sub.n](t),
Since this type of strategy is typical of hedging problems, it is worthwhile to derive the dynamic hedge
and discuss its operation.
For example, we will hedge global fixed interest 100%, whereas with global equities, we have a more dynamic hedge
. We see the rapid rise in the Australian dollar without a commensurate rise in the terms of trade or structural adjustments required by Australian industry as a huge risk.
These dynamic hedge
adjustments in response to a fall in prices could introduce further downward pressure on prices.
The difference between a portfolio insurance strategy implemented through a "dynamic hedge
," as in a stop-loss selling program, and a portfolio insurance program implemented through the purchase of a put option is that, when you buy a put, you offer the world valuable information about your expectations that the market might decline, but when you rely on stop-loss selling, you offer the market no information because your strategy is kept secret.
At the same time, also by considering memory effects, the continuous-time hedge model with memory based on the fractional order stochastic differential equation driven by a fractional Brownian motion to estimate the optimal dynamic hedge
ratio was established.
Therefore, life insurance can serve as a dynamic hedge
vehicle against unexpected mortality risk.
Since this type of strategy is typical of hedging problems, it is worthwhile deriving the dynamic hedge
and discussing its operation.
Nalholm, and R Schwendner, 2006, "Static versus Dynamic Hedges
: An Empirical Comparison for Barrier Options," Review of Derivatives Research 9, 239-264.