Dynamic Hedging in Incomplete Markets: A Simple Solution

• 成果类型: Article
• 署名作者: Basak, Suleyman; Chabakauri, Georgy
• 署名单位: University of London; London School Economics & Political Science; Center for Economic & Policy Research (CEPR)
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhs050
• 发表日期: 2012
• 页码: 1845
• 关键词: LOCAL PARAMETRIC ANALYSIS; Optimal portfolio choice; FUTURES MARKETS; stochastic volatility; CORRELATION RISK; price; options; STOCK; performance; valuation

摘要

We provide fully analytical, optimal dynamic hedges in incomplete markets by employing the traditional minimum-variance criterion. Our hedges are in terms of generalized Greeks and naturally extend no-arbitrage-based risk management in complete markets to incomplete markets. Whereas the literature characterizes either minimum-variance static, myopic, or dynamic hedges from which a hedger may deviate unless able to precommit, our hedges are time-consistent. We apply our results to derivatives replication with infrequent trading and determine hedges and replication values, which reduce to generalized Black-Scholes expressions in specific settings. We also investigate dynamic hedging with jumps, stochastic correlation, and portfolio management with benchmarking.