Semi-Static and Sparse Variance-Optimal Hedging

DOI10.1111/MAFI.12235MaRDI QIDQ6291397arXivFDO

Authors P. Di Tella, Martin Haubold, Martin Keller-Ressel

Publication date 16 September 2017

Published in arXiv

Full work available at URL https://doi.org/10.1111/MAFI.12235

Mathematics Subject Classification ID

Portfolio theory (91G10) Derivative securities (option pricing, hedging, etc.) (91G20)

arXiv classification

math.PR q-fin.MF

Abstract: We consider hedging of a contingent claim by a 'semi-static' strategy composed of a dynamic position in one asset and static (buy-and-hold) positions in other assets. We give general representations of the optimal strategy and the hedging error under the criterion of variance-optimality and provide tractable formulas using Fourier-integration in case of the Heston model. We also consider the problem of optimally selecting a sparse semi-static hedging strategy, i.e. a strategy which only uses a small subset of available hedging assets. The developed methods are illustrated in an extended numerical example where we compute a sparse semi-static hedge for a variance swap using European options as static hedging assets.

This page was built for publication: Semi-Static and Sparse Variance-Optimal Hedging

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q6291397)