On optimal partial hedging in discrete markets

The paper considers arbitrage-free discrete markets representing them in the form of scenario trees. Two well-known problems of quantile hedging and hedging with minimal risk of shortfall are analysed. Methods of solving these problems are discussed. The dynamic programming algorithm is used to buil...

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Bibliographic Details
Published in:Optimization 2013-11, Vol.62 (11), p.1403-1418
Main Authors: Morozov, V.V., Soloviev, A.I.
Format: Article
Language:English
Subjects:
Algorithms
arbitrage-free markets
Dynamic programming
Hedging
Investment policy
linear programming
quantile hedging
risk of shortfall
scenario tree
Studies
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Summary:The paper considers arbitrage-free discrete markets representing them in the form of scenario trees. Two well-known problems of quantile hedging and hedging with minimal risk of shortfall are analysed. Methods of solving these problems are discussed. The dynamic programming algorithm is used to build the hedging strategy.
ISSN:0233-1934
1029-4945
DOI:10.1080/02331934.2013.854784