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Risk minimization under transaction costs

Listed author(s):
  • Paolo Guasoni


    (Bank of Italy, Research Department, Via Nazionale, 91, 00184 Roma, Italy Manuscript)

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    We study the general problem of an agent wishing to minimize the risk of a position at a fixed date. The agent trades in a market with a risky asset, with incomplete information, proportional transaction costs, and possibly constraints on strategies. In particular, this framework includes the problems of hedging contingent claims and maximizing utility from wealth. We obtain a minimization problem on a space of predictable processes with finite variation. Borrowing a technique from Calculus of Variation, on this space we look for a convergence which makes minimizing sequences relatively compact, and risk lower semicontinuous. For a class of convex decreasing risk functionals, we show the existence of optimal strategies. Examples include the problems of shortfall minimization, utility maximization, and minimization ofcoherent risk measures.

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    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 6 (2002)
    Issue (Month): 1 ()
    Pages: 91-113

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    Handle: RePEc:spr:finsto:v:6:y:2002:i:1:p:91-113
    Note: received: March 2000; final version received: February 2001
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