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Wiener Chaos: A New Approach To Option Hedging

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  • Vincent Lacoste

Abstract

This paper addresses the problem of estimating and analyzing the residual risk that is not hedged by a discrete hedging strategy. the use of die chaotic representation allows an elegant decomposition of the residual risk to be hedged by adequate assets. Alternative strategies to the classical delta hedging and optimization under the risk-neutral and historical probabilities are discussed. Copyright 1996 Blackwell Publishers.

Suggested Citation

  • Vincent Lacoste, 1996. "Wiener Chaos: A New Approach To Option Hedging," Mathematical Finance, Wiley Blackwell, vol. 6(2), pages 197-213.
  • Handle: RePEc:bla:mathfi:v:6:y:1996:i:2:p:197-213
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9965.1996.tb00077.x
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    References listed on IDEAS

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    1. Florenzano, Monique & Gourdel, Pascal, 1994. "T-period economies with incomplete markets," Economics Letters, Elsevier, vol. 44(1-2), pages 91-97.
    2. Brown, Donald J & Lewis, Lucinda M, 1981. "Myopic Economic Agents," Econometrica, Econometric Society, pages 359-368.
    3. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
    4. Alejandro Hernandez & Manuel Santos, 1994. "Competitive Equilibria for Infinite-Horizon Economies with Incomplete Markets," Working Papers 9407, Centro de Investigacion Economica, ITAM.
    5. Mas-Colell, Andreu & Zame, William R., 1991. "Equilibrium theory in infinite dimensional spaces," Handbook of Mathematical Economics,in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 34, pages 1835-1898 Elsevier.
    6. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 4(3), pages 514-540, June.
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    Cited by:

    1. Eric Benhamou, 2000. "Pricing Convexity Adjustment with Wiener Chaos," FMG Discussion Papers dp351, Financial Markets Group.
    2. Antonio Cosma & Stefano Galluccio & Paola Pederzoli & O. Scaillet, 2016. "Early Exercise Decision in American Options with Dividends, Stochastic Volatility and Jumps," Swiss Finance Institute Research Paper Series 16-73, Swiss Finance Institute.
    3. Antonio Cosma & Stefano Galluccio & Paola Pederzoli & O. Scaillet, "undated". "Valuing American Options Using Fast Recursive Projections," Swiss Finance Institute Research Paper Series 12-26, Swiss Finance Institute.
    4. Tebaldi, Claudio, 2005. "Hedging using simulation: a least squares approach," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1287-1312, August.
    5. repec:spr:finsto:v:22:y:2018:i:1:d:10.1007_s00780-017-0347-1 is not listed on IDEAS
    6. Darolles, Serge & Laurent, Jean-Paul, 2000. "Approximating payoffs and pricing formulas," Journal of Economic Dynamics and Control, Elsevier, pages 1721-1746.
    7. Lionel Martellini, 2000. "Efficient Option Replication in the Presence of Transactions Costs," Review of Derivatives Research, Springer, pages 107-131.

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