On infinite-horizon minimum-cost hedging under cone constraints
AbstractWe 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.
Download InfoIf 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.
Bibliographic InfoPaper provided by Utah State University, Department of Economics in its series Working Papers with number 2000-22.
Length: 21 pages
Date of creation:
Date of revision:
Infinite horizon; minimum-cost hedging; cone constraints;
Other versions of this item:
- Huang, Kevin X. D., 2002. "On infinite-horizon minimum-cost hedging under cone constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 283-301, December.
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Taggart, Robert A, Jr, 1977. "A Model of Corporate Financing Decisions," Journal of Finance, American Finance Association, vol. 32(5), pages 1467-84, December.
- Robert J. Shiller, 1992.
"Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures,"
Cowles Foundation Discussion Papers
1036, Cowles Foundation for Research in Economics, Yale University.
- Shiller, Robert J, 1993. " Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures," Journal of Finance, American Finance Association, vol. 48(3), pages 911-31, July.
- Robert J. Shiller, 1993. "Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures indices and Perpetual Futures," NBER Technical Working Papers 0131, National Bureau of Economic Research, Inc.
- Kallal, Hedi & Jouini, Elyès, 1995. "Martingales and arbitrage in securities markets with transaction costs," Economics Papers from University Paris Dauphine 123456789/5630, Paris Dauphine University.
- Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-67, November.
- Marsh, Paul, 1982. " The Choice between Equity and Debt: An Empirical Study," Journal of Finance, American Finance Association, vol. 37(1), pages 121-44, March.
- Bernard Bensaid & Jean-Philippe Lesne & Henri Pagès & José Scheinkman, 1992. "Derivative Asset Pricing With Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 63-86.
- Aliprantis, C. D. & Brown, D. J. & Werner, J., 2000.
"Minimum-cost portfolio insurance,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 24(11-12), pages 1703-1719, October.
- Broadie, Mark & Cvitanic, Jaksa & Soner, H Mete, 1998. "Optimal Replication of Contingent Claims under Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 59-79.
- Huang, K.X., 1999.
"Valuation and Asset Pricing in Infinite Horizon Sequential Markets with Portfolio Constraints,"
302, Minnesota - Center for Economic Research.
- Kevin Huang, . "Valuation and asset pricing in infinite-horizon sequential markets with portfolio constraints," Working Papers 2000-09, Utah State University, Department of Economics.
- 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.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- repec:fth:inseep:9513 is not listed on IDEAS
- Manuel S. Santos & Michael Woodford, 1993.
"Rational Asset Pricing Bubbles,"
9304, Centro de Investigacion Economica, ITAM.
- Edirisinghe, Chanaka & Naik, Vasanttilak & Uppal, Raman, 1993. "Optimal Replication of Options with Transactions Costs and Trading Restrictions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 117-138, March.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Jouini Elyes & Kallal Hedi, 1995. "Martingales and Arbitrage in Securities Markets with Transaction Costs," Journal of Economic Theory, Elsevier, vol. 66(1), pages 178-197, June.
- Dumas, Bernard & Luciano, Elisa, 1991. " An Exact Solution to a Dynamic Portfolio Choice Problem under Transactions Costs," Journal of Finance, American Finance Association, vol. 46(2), pages 577-95, June.
- Naik, Vasanttilak & Uppal, Raman, 1994. "Leverage Constraints and the Optimal Hedging of Stock and Bond Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(02), pages 199-222, June.
- 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, vol. 30(1), pages 55-79, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John Gilbert).
If references are entirely missing, you can add them using this form.