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A utility maximization approach to hedging in incomplete markets

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  • Jan Kallsen

Abstract

In this paper we introduce the notion of portfolio optimization by maximizing expected local utility. This concept is related to maximization of expected utility of consumption but, contrary to this common approach, the discounted financial gains are consumed immediately. In a general continuous-time market optimal portfolios are obtained by pointwise solution of equations involving the semimartingale characteristics of the underlying securities price process. The new concept is applied to hedging problems in frictionless, incomplete markets. Copyright Springer-Verlag Berlin Heidelberg 1999

Suggested Citation

  • Jan Kallsen, 1999. "A utility maximization approach to hedging in incomplete markets," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 50(2), pages 321-338, October.
    • Handle: RePEc:spr:mathme:v:50:y:1999:i:2:p:321-338
    DOI: 10.1007/s001860050100
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    Citations

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    Cited by:

    1. Richard J Martin, 2016. "Universal trading under proportional transaction costs," Papers 1603.06558, arXiv.org.
    2. Christoph Czichowsky, 2013. "Time-consistent mean-variance portfolio selection in discrete and continuous time," Finance and Stochastics, Springer, vol. 17(2), pages 227-271, April.
    3. Friedrich Hubalek & Jan Kallsen & Leszek Krawczyk, 2006. "Variance-optimal hedging for processes with stationary independent increments," Papers math/0607112, arXiv.org.
    4. Yumi Oum & Shmuel Oren & Shijie Deng, 2006. "Hedging quantity risks with standard power options in a competitive wholesale electricity market," Naval Research Logistics (NRL), John Wiley & Sons, vol. 53(7), pages 697-712, October.
    5. Junichi Imai, 2022. "A Numerical Method for Hedging Bermudan Options under Model Uncertainty," Methodology and Computing in Applied Probability, Springer, vol. 24(2), pages 893-916, June.
    6. Christoph Czichowsky, 2012. "Time-Consistent Mean-Variance Portfolio Selection in Discrete and Continuous Time," Papers 1205.4748, arXiv.org.

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