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An Algorithmic Approach to Non-self-financing Hedging in a Discrete-Time Incomplete Market

Author

Listed:
  • N. Josephy
  • L. Kimball
  • A. Nagaev
  • M. Pasniewski
  • V. Steblovskaya

Abstract

We present an algorithm producing a dynamic non-self-financing hedging strategy in an incomplete market corresponding to investor-relevant risk criterion. The optimization is a two stage process that first determines admissible model parameters that correspond to the market price of the option being hedged. The second stage applies various merit functions to bootstrapped samples of model residuals to choose an optimal set of model parameters from the admissible set. Results are presented for options traded on the New York Stock Exchange.

Suggested Citation

  • N. Josephy & L. Kimball & A. Nagaev & M. Pasniewski & V. Steblovskaya, 2006. "An Algorithmic Approach to Non-self-financing Hedging in a Discrete-Time Incomplete Market," Papers math/0606471, arXiv.org.
    • Handle: RePEc:arx:papers:math/0606471
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    References listed on IDEAS

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    1. Nagaev, Alexander V. & Nagaev, Sergei A. & Kunst, Robert M., 2005. "A Diffusion Approximation for the Riskless Profit Under Selling of Discrete Time Call Options. Non-identically Distributed Jumps," Economics Series 164, Institute for Advanced Studies.
    2. Nagaev, Sergei A., 2003. "A Diffusion Approximation for the Riskless Profit under Selling of Discrete Time Call Options," Economics Series 137, Institute for Advanced Studies.
    3. Nagaev, Alexander V. & Nagaev, Sergei A. & Kunst, Robert M., 2005. "A Diffusion Approximation to the Markov Chains Model of the Financial Market and the Expected Riskless Profit Under Selling of Call and Put Options," Economics Series 165, Institute for Advanced Studies.
    4. Ola Hammarlid, 1998. "On Minimizing Risk in Incomplete Markets Option Pricing Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 1(02), pages 227-233.
    5. Grazyna Wolczynska, 1998. "Option pricing in incomplete discrete markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 5(3-4), pages 165-179.
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