- TITLE: Coherent Hedging in Incomplete Markets.
- AUTHOR: Birgit Rudloff
- ABSTRACT: In incomplete financial markets not every contingent claim can
be perfectly replicated by a self-financing strategy.
In this paper, we want to minimize the risk that the value of the hedging portfolio falls below the payoff of the claim at time T.
We use a coherent risk measure, introduced by Artzner, Delbaen, Eber, Heath (1999), to measure the risk of the shortfall. The dynamic optimization problem of finding a self-financing strategy that minimizes the
coherent risk of the shortfall can be split into a static
optimization problem and a representation problem. 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 0-1-structure.
Our results improve the ones obtained by Nakano (2003). The optimal hedging strategy consists in superhedging a modified claim that is the product of the original payoff and the solution to the static problem.
- STATUS: Quantitative Finance 9 (2), 197 - 206, 2009. [pdf]
Back to Birgit Rudloff's page