Article ID: | iaor2009780 |
Country: | United Kingdom |
Volume: | 8 |
Issue: | 3 |
Start Page Number: | 299 |
End Page Number: | 312 |
Publication Date: | Apr 2008 |
Journal: | Quantitative Finance |
Authors: | Meindl Peter J., Primbs James A. |
Keywords: | programming: probabilistic |
We propose a new methodology for discrete time dynamic hedging with transaction costs that has three key performance features. First the methodology can accommodate the use of a wide range of objective functions, from the use of many types of utility functions to the more traditional objectives of hedging error minimization. Second, our methodology can significantly outperform traditional dynamic hedging methodologies across a range of objective functions. Third, our methodology can be applied to both single- and multi-dimensional options while analytical methods typically can only be applied to single-dimensional options.