Dynamic hedging of single- and multi-dimensional options with transaction costs: a generalized utility maximization approach

Dynamic hedging of single- and multi-dimensional options with transaction costs: a generalized utility maximization approach

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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: ,
Keywords: programming: probabilistic
Abstract:

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.

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