Article ID: | iaor20081355 |
Country: | United States |
Volume: | 54 |
Issue: | 6 |
Start Page Number: | 1051 |
End Page Number: | 1062 |
Publication Date: | Nov 2006 |
Journal: | Operations Research |
Authors: | Kolen Antoon, Lutgens Frank, Sturm Jos |
Keywords: | investment |
We consider robust optimization to cope with uncertainty about the stock return process in one-period option hedging problems. The robust approach relates portfolio choice to uncertainty, making more cautious hedges when uncertainty is high. We represent uncertainty by a set of plausible expected returns of the underlying stocks and show that for this set the robust problem is a second-order cone program that can be solved efficiently. We apply the approach to find an optimal portfolio to hedge an index option.