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Title:Efficient hedging for a complete jump-diffusion model PDF Logo
Authors:Kirch, Michael
Krutchenko, R. N.
Melnikov, Aleksandr V.
Issue Date:2002
Series/Report no.:Discussion Papers, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 2002,27
Abstract: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.
Subjects:Efficient hedging
Quantile Hedging
martingale Measure
Persistent Identifier of the first edition:urn:nbn:de:kobv:11-10048859
Document Type:Working Paper
Appears in Collections:Discussion Papers, SFB 373, HU Berlin

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