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Explicit Representation of Cost-Efficient Strategies

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Listed:
  • Carole Bernard
  • Phelim P. Boyle
  • Steven Vanduffel

Abstract

In this paper, we give an explicit representation of the lowest cost strategy to achieve a given payoff distribution (that we call “cost-efficient” strategy). For any inefficient strategy, we are able to construct financial derivatives which dominate in the sense of first-order or second-order stochastic dominance. We highlight the connections between cost-efficiency and dependence. This allows us to extend the theory to deal with state-dependent constraints to better reflect real-world preferences. We show in particular that path-dependent strategies (although inefficient in the Black Scholes setting) may become optimal in the presence of state-dependent constraints.

Suggested Citation

  • Carole Bernard & Phelim P. Boyle & Steven Vanduffel, 2014. "Explicit Representation of Cost-Efficient Strategies," Finance, Presses universitaires de Grenoble, vol. 35(2), pages 5-55.
  • Handle: RePEc:cai:finpug:fina_352_0005
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    Citations

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    Cited by:

    1. Bernard Carole & Liu Yuntao & MacGillivray Niall & Zhang Jinyuan, 2013. "Bounds on Capital Requirements For Bivariate Risk with Given Marginals and Partial Information on the Dependence," Dependence Modeling, De Gruyter, vol. 1, pages 37-53, October.
    2. Rüschendorf Ludger & Wolf Viktor, 2015. "Cost-efficiency in multivariate Lévy models," Dependence Modeling, De Gruyter, vol. 3(1), pages 1-16, April.
    3. repec:wsi:ijtafx:v:21:y:2018:i:03:n:s0219024918500139 is not listed on IDEAS
    4. Phillip Monin, 2013. "On a dynamic adaptation of the Distribution Builder approach to investment decisions," Papers 1301.0907, arXiv.org.
    5. Carole Bernard & Junsen Tang, 2016. "Simplified Hedge For Path-Dependent Derivatives," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(07), pages 1-32, November.
    6. Carole Bernard & Franck Moraux & Ludger Rüschendorf & Steven Vanduffel, 2015. "Optimal payoffs under state-dependent preferences," Quantitative Finance, Taylor & Francis Journals, vol. 15(7), pages 1157-1173, July.
    7. repec:eee:ejores:v:275:y:2019:i:2:p:755-767 is not listed on IDEAS
    8. Fajardo, José & Corcuera, José Manuel & Menouken Pamen, Olivier, 2016. "On the optimal investment," MPRA Paper 71901, University Library of Munich, Germany.
    9. Bernard, Carole & Chen, Jit Seng & Vanduffel, Steven, 2015. "Rationalizing investors’ choices," Journal of Mathematical Economics, Elsevier, vol. 59(C), pages 10-23.

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