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On infinite-horizon minimum-cost hedging under cone constraints

  • Huang, Kevin X. D.

We 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.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 27 (2002)
Issue (Month): 2 (December)
Pages: 283-301

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Handle: RePEc:eee:dyncon:v:27:y:2002:i:2:p:283-301
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