Open AccessA Time‐Series Approach to Non‐Self‐Financing Hedging in a Discrete‐Time Incomplete Market
Author(s) -
Norman Josephy,
Lucia Kimball,
Victoria Steblovskaya
Publication year - 2008
Publication title -
international journal of stochastic analysis
Language(s) - English
Resource type - Journals
eISSN - 2090-3340
pISSN - 2090-3332
DOI - 10.1155/2008/275217
Subject(s) - discrete time and continuous time , stock market , series (stratigraphy) , stock exchange , econometrics , jump , economics , market neutral , incomplete markets , set (abstract data type) , mathematics , mathematical optimization , finance , computer science , microeconomics , portfolio , statistics , biology , horse , programming language , quantum mechanics , paleontology , physics
We present an algorithm producing a dynamic non-self-financing hedging strategy in an incomplete market corresponding to investor-relevant risk criterion. The optimization is a two-stage process that first determines market calibrated model parameters that correspond to the market price of the option being hedged. In the second stage, an optimal set of model parameters is chosen from the market calibrated set. This choice is based on stock price simulations using a time-series model for stock price jump evolution. Results are presented for options traded on the New York Stock Exchange
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