Advanced Search
MyIDEAS: Login to save this paper or follow this series

Tractable Hedging - An Implementation of Robust Hedging Strategies


Author Info

  • Nicole Branger


  • Antje Mahayni
Registered author(s):


    This paper analyzes tractable robust hedging strategies in diffusion-type models including stochastic volatility models. A robust hedging strategy avoids any losses as long as volatility stays within a given interval. It does not depend on the exact specification of the volatility process and therefore mitigates problems caused by model misspecification. A tractable hedging strategy is defined as the sum over Black-Scholes strategies. For a convex (concave) payoff, the cheapest robust hedge is given by a BS-hedge at the upper (lower) volatility bound. Thus, it is tractable. For all other payoffs, one has to solve a Black-Scholes-Barenblatt equation, and the cheapest robust hedge is not tractable. A tractable hedge can then be found by decomposing the payoff into a convex and a concave function, each of which is hedged separately. We first give the decomposition that minimizes the initial capital. Second, we show that it may be even cheaper to hedge a dominating payoff, and we show explicitly how to determine the optimal dominating payoff. We illustrate our results by two examples.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL:
    Download Restriction: no

    Bibliographic Info

    Paper provided by Department of Finance, Goethe University Frankfurt am Main in its series Working Paper Series: Finance and Accounting with number 135.

    as in new window
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:fra:franaf:135

    Contact details of provider:
    Postal: Senckenberganlage 31, 60054 Frankfurt
    Phone: 0049-69-798-28269
    Fax: 0049-69-798-28272
    Web page:
    More information through EDIRC

    Related research

    Keywords: Stochastic volatility; robust hedging; tractable hedging; superhedging; model misspecification; incomplete markets;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:


    No references listed on IDEAS
    You can help add them by filling out this form.



    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


    Access and download statistics


    When requesting a correction, please mention this item's handle: RePEc:fra:franaf:135. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reinhard H. Schmidt).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.