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

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  • Peter Meindl
  • James Primbs

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.

Suggested Citation

  • Peter Meindl & James Primbs, 2008. "Dynamic hedging of single and multi-dimensional options with transaction costs: a generalized utility maximization approach," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 299-312.
    • Handle: RePEc:taf:quantf:v:8:y:2008:i:3:p:299-312
    DOI: 10.1080/14697680701381210
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    Citations

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    Cited by:

    1. James Primbs & Chang Sung, 2008. "A Stochastic Receding Horizon Control Approach to Constrained Index Tracking," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 15(1), pages 3-24, March.
    2. Pascal Franc{c}ois & Genevi`eve Gauthier & Fr'ed'eric Godin & Carlos Octavio P'erez Mendoza, 2024. "Enhancing Deep Hedging of Options with Implied Volatility Surface Feedback Information," Papers 2407.21138, arXiv.org.
    3. Yuji Yamada & James A. Primbs, 2018. "Model Predictive Control for Optimal Pairs Trading Portfolio with Gross Exposure and Transaction Cost Constraints," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 25(1), pages 1-21, March.
    4. Peter Nystrup & Stephen Boyd & Erik Lindström & Henrik Madsen, 2019. "Multi-period portfolio selection with drawdown control," Annals of Operations Research, Springer, vol. 282(1), pages 245-271, November.

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