Efficient hedging for a complete jump-diffusion model

Arbeitspapier

This paper is devoted to the problem of hedging contingent claims in the framework of a complete two-factor jump-diffusion model. In this context, it is well understood that every contingent claim can be hedged perfectly if one invests the unique arbitrage-free price. Based on the results of H. Föllmer and P. Leukert [4][ 5] in a general semimartingale setting, we determine the unique hedging strategies which minimize a suitably defined shortfall risk under a given cost constraint. We derive explicit formulas for this so-called efficient or quantile hedging strategy for a European call option. We then compare the performance of the optimal strategy for different degrees of the investor's risk-aversion.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 373 Discussion Paper ; No. 2002,27

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: Efficient hedging ; Quantile Hedging ; jump-diffusion ; martingale Measure

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kirch, Michael ; Krutchenko, R. N. ; Melnikov, Aleksandr V.
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes
• (where): Berlin
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/65298
• URN: urn:nbn:de:kobv:11-10048859
• Last update: 10.03.2025, 11:42 AM CET