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An Algorithmic Approach to Non-self-financing Hedging in a Discrete-Time Incomplete Market

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  • N. Josephy
  • L. Kimball
  • A. Nagaev
  • M. Pasniewski
  • V. Steblovskaya
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    Abstract

    We present an algorithm producing a dynamic non-self-financing hedging strategy in an incomplete market corresponding to investor-relevant risk criterion. The optimization is a two stage process that first determines admissible model parameters that correspond to the market price of the option being hedged. The second stage applies various merit functions to bootstrapped samples of model residuals to choose an optimal set of model parameters from the admissible set. Results are presented for options traded on the New York Stock Exchange.

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    File URL: http://arxiv.org/pdf/math/0606471
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number math/0606471.

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    Date of creation: Jun 2006
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    Handle: RePEc:arx:papers:math/0606471

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    Web page: http://arxiv.org/

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    1. Nagaev, Alexander V. & Nagaev, Sergei A. & Kunst, Robert M., 2005. "A Diffusion Approximation to the Markov Chains Model of the Financial Market and the Expected Riskless Profit Under Selling of Call and Put Options," Economics Series 165, Institute for Advanced Studies.
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