- TITLE: Convex Hedging in Incomplete Markets.
- AUTHOR: Birgit Rudloff
- ABSTRACT: In incomplete financial markets not every contingent claim can be
replicated by a self-financing strategy. The risk of the resulting
shortfall can be measured by convex risk measures, recently
introduced by Foellmer and Schied (2002). The dynamic optimization problem of
finding a self-financing strategy that minimizes the convex risk of
the shortfall can be split into a static optimization problem and a
representation problem. It follows that the optimal strategy
consists in superhedging the modified claim,
which is the product of the original payoff of the claim with
the solution of the static optimization problem, the optimal
In this paper, we will deduce necessary and
sufficient optimality conditions for the static problem using
convex duality methods. The solution of the static optimization
problem turns out to be a randomized test with a typical
- STATUS: Applied Mathematical Finance 14 (5), 437 - 452, 2007.
- PAPER: Convex Hedging in Incomplete Markets in pdf.
Back to Birgit Rudloff's page