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On infinite-horizon minimum-cost hedging under cone constraints

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  • Huang, Kevin X. D.

Abstract

We prove there exists and analyze a strategy that minimizes the cost of hedging a liability stream in infinite-horizon incomplete security markets with a type of constraints that feasible portfolio strategies form a convex cone. We provide a theorem that extends Stiemke Lemma to over cone domains and we use the result to construct a series of primal-dual problems. Applying stochastic duality theory, dynamic programming technique and the theory of convex analysis to the dual formulation, we decompose the infinite-horizon dynamic hedging problem into one-period static hedging problems such that optimal portfolios in different events can be solved for independently.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 27 (2002)
Issue (Month): 2 (December)
Pages: 283-301

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Handle: RePEc:eee:dyncon:v:27:y:2002:i:2:p:283-301

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  1. Kevin X.D. Huang & Jan Werner, 2000. "Asset price bubbles in Arrow-Debreu and sequential equilibrium," Economic Theory, Springer, vol. 15(2), pages 253-278.
  2. Huang, K.X., 1999. "Valuation and Asset Pricing in Infinite Horizon Sequential Markets with Portfolio Constraints," Papers, Minnesota - Center for Economic Research 302, Minnesota - Center for Economic Research.
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Cited by:
  1. Baccara, Mariagiovanna & Battauz, Anna & Ortu, Fulvio, 2006. "Effective securities in arbitrage-free markets with bid-ask spreads at liquidation: a linear programming characterization," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(1), pages 55-79, January.

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