Efficient hedging: Cost versus shortfall risk

Arbeitspapier

An investor faced with a contingent claim may eliminate risk by (super-)hedging in a financial market. As this is often quite expensive, we study partial hedges, which require less capital and reduce the risk. In a previous paper we determined quantile hedges which succeed with maximal probability, given a capital constraint. Here we look for strategies which minimize the shortfall risk defined as the expectation of the shortfall weighted by some loss function. The resulting efficient hedges allow the investor to interpolate in a systematic way between the extremes of no hedge and a perfect (super-)hedge, depending on the accepted level of shortfall risk.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 373 Discussion Paper ; No. 1999,18

Classification and Topics

• Classification: Wirtschaft ; General Financial Markets: General (includes Measurement and Data) ; Asset Pricing; Trading Volume; Bond Interest Rates ; Contingent Pricing; Futures Pricing; option pricing ; Criteria for Decision-Making under Risk and Uncertainty
• Subject: risk management ; stochastic volatility ; shortfall risk ; Hedging ; efficient hedges ; lower partial moments ; convex duality

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Föllmer, Hans ; Leukert, Peter
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes
• (where): Berlin
• (when): 1999

Further information

• Handle: http://hdl.handle.net/10419/61739
• URN: urn:nbn:de:kobv:11-10056108
• Last update: 10.03.2025, 11:44 AM CET