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Buyer's quantile hedge portfolios in discrete-time trading

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  • Mustafa Ç. Pinar

Abstract

The problem of quantile hedging for American claims is studied from the perspective of the buyer of a contingent claim by minimizing the ‘expected failure ratio’. After a general study of the problem in infinite-state spaces, we pass to finite dimensions and examine the properties of the resulting finite-dimensional optimization problems. In finite-state probability spaces we obtain a bilinear programming formulation that admits an exact linearization using binary exercise variables. Numerical results with S&P 500 index options demonstrate the computational viability of the formulations.

Suggested Citation

  • Mustafa Ç. Pinar, 2010. "Buyer's quantile hedge portfolios in discrete-time trading," Quantitative Finance, Taylor & Francis Journals, vol. 13(5), pages 729-738, October.
    • Handle: RePEc:taf:quantf:v:13:y:2010:i:5:p:729-738
    DOI: 10.1080/14697688.2010.538075
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    References listed on IDEAS

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    1. Prasad Chalasani & Somesh Jha, 2001. "Randomized Stopping Times and American Option Pricing with Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 11(1), pages 33-77, January.
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