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Nonquadratic Local Risk-Minimization for Hedging Contingent Claims in Incomplete Markets

Author

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  • Frédéric Abergel

    (MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec)

  • Nicolas Millot

    (MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec)

Abstract

Local risk minimization is studied for the hedging of derivatives - a general (non quadratic) risk criterion is studied, and the optimality conditions are derived.

Suggested Citation

  • Frédéric Abergel & Nicolas Millot, 2011. "Nonquadratic Local Risk-Minimization for Hedging Contingent Claims in Incomplete Markets," Post-Print hal-00620843, HAL.
    • Handle: RePEc:hal:journl:hal-00620843
    DOI: 10.1137/100803079
    Note: View the original document on HAL open archive server: https://hal.science/hal-00620843
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    References listed on IDEAS

    as
    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Föllmer, H. & Schweizer, M., 1989. "Hedging by Sequential Regression: an Introduction to the Mathematics of Option Trading," ASTIN Bulletin, Cambridge University Press, vol. 19(S1), pages 29-42, November.
    3. Schweizer, Martin, 1991. "Option hedging for semimartingales," Stochastic Processes and their Applications, Elsevier, vol. 37(2), pages 339-363, April.
    4. David Heath & Eckhard Platen & Martin Schweizer, 2001. "A Comparison of Two Quadratic Approaches to Hedging in Incomplete Markets," Mathematical Finance, Wiley Blackwell, vol. 11(4), pages 385-413, October.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Emmanuel Gobet & Isaque Pimentel & Xavier Warin, 2020. "Option valuation and hedging using asymmetric risk function: asymptotic optimality through fully nonlinear Partial Differential Equations," Post-Print hal-01761234, HAL.
    2. Patrice Gaillardetz & Saeb Hachem, 2019. "Risk-Control Strategies," Papers 1908.02228, arXiv.org.
    3. Frédéric Abergel & Grégoire Loeper, 2013. "Pricing and hedging contingent claims with liquidity costs and market impact," Working Papers hal-00802402, HAL.
    4. Frédéric Abergel, 2013. "Comparing quadratic and non-quadratic local risk minimization for the hedging of contingent claims," Working Papers hal-00771528, HAL.
    5. repec:hal:wpaper:hal-01761234 is not listed on IDEAS
    6. Emmanuel Gobet & Isaque Pimentel & Xavier Warin, 2020. "Option valuation and hedging using an asymmetric risk function: asymptotic optimality through fully nonlinear partial differential equations," Finance and Stochastics, Springer, vol. 24(3), pages 633-675, July.

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