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Efficient hedging for a complete jump-diffusion model

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  • Kirch, Michael
  • Krutchenko, R. N.
  • Melnikov, Aleksandr V.
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    Abstract

    This paper is devoted to the problem of hedging contingent claims in the framework of a complete two-factor jump-diffusion model. In this context, it is well understood that every contingent claim can be hedged perfectly if one invests the unique arbitrage-free price. Based on the results of H. Föllmer and P. Leukert [4][ 5] in a general semimartingale setting, we determine the unique hedging strategies which minimize a suitably defined shortfall risk under a given cost constraint. We derive explicit formulas for this so-called efficient or quantile hedging strategy for a European call option. We then compare the performance of the optimal strategy for different degrees of the investor's risk-aversion. --

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    Bibliographic Info

    Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2002,27.

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    Date of creation: 2002
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    Handle: RePEc:zbw:sfb373:200227

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    Keywords: Efficient hedging; Quantile Hedging; jump-diffusion; martingale Measure;

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