Dynamic hedging of conditional value-at-risk
AbstractIn this paper, the problem of partial hedging is studied by constructing hedging strategies that minimize conditional value-at-risk (CVaR) of the portfolio. Two dual versions of the problem are considered: minimization of CVaR with the initial wealth bounded from above, and minimization of hedging costs subject to a CVaR constraint. The Neyman–Pearson lemma approach is used to deduce semi-explicit solutions. Our results are illustrated by constructing CVaR-efficient hedging strategies for a call option in the Black–Scholes model and also for an embedded call option in an equity-linked life insurance contract.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 51 (2012)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/inca/505554
IB10; IM01; IM10; IM53; Conditional value-at-risk; Dynamic hedging; Stochastic modeling; Quantile hedging; Unit-linked contracts;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
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