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Crash Hedging Strategies And Worst-Case Scenario Portfolio Optimization

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  • OLAF MENKENS

    (School of Mathematical Sciences, Dublin City University, Glasnevin, Dublin 9, Ireland)

Abstract

Crash hedging strategies are derived as solutions of non-linear differential equations which itself are consequences of an equilibrium strategy which make the investor indifferent to uncertain (down) jumps. This is done in the situation where the investor has a logarithmic utility and where the market coefficients after a possible crash may change. It is scrutinized when and in which sense the crash hedging strategy is optimal. The situation of an investor with incomplete information is considered as well. Finally, introducing the crash horizon, an implied volatility is derived.

Suggested Citation

  • Olaf Menkens, 2006. "Crash Hedging Strategies And Worst-Case Scenario Portfolio Optimization," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(04), pages 597-618.
    • Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:04:n:s0219024906003706
    DOI: 10.1142/S0219024906003706
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    References listed on IDEAS

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    1. Richard Bellman, 1957. "On a Dynamic Programming Approach to the Caterer Problem--I," Management Science, INFORMS, vol. 3(3), pages 270-278, April.
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    Cited by:

    1. Michael Ludkovski & Qunying Shen, 2012. "European Option Pricing with Liquidity Shocks," Papers 1205.1007, arXiv.org.
    2. Belak, Christoph & Christensen, Sören & Menkens, Olaf, 2014. "Worst-case optimal investment with a random number of crashes," Statistics & Probability Letters, Elsevier, vol. 90(C), pages 140-148.

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