Market price‐based convex risk measures: A distribution‐free optimization approach

Market price‐based convex risk measures: A distribution‐free optimization approach

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Article ID: iaor20121926
Volume: 40
Issue: 2
Start Page Number: 128
End Page Number: 133
Publication Date: Mar 2012
Journal: Operations Research Letters
Authors: ,
Keywords: risk, simulation: applications, probability, optimization
Abstract:

In Cont (2006) , a convex risk measure was proposed to measure the impact of uncertainty resulting from the misspecification of derivative models. Evaluation of the risk measures was illustrated on finite families of probability measures. In this paper, we consider the case of infinite families of measures that share common moments, e.g. mean and variance for European‐style options. We show that the risk measure can still be efficiently evaluated based on semi‐infinite programming. Examples are given that illustrate the benefits of evaluating the risk measure with infinite families of measures and shed light on the limitations of considering only finite families of measures.

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