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Optimal hedging in discrete time


  • Bruno R'emillard


  • Sylvain Rubenthaler



Building on the work of Schweizer (1995) and Cern and Kallseny (2007), we present discrete time formulas minimizing the mean square hedging error for multidimensional assets. In particular, we give explicit formulas when a regime-switching random walk or a GARCH-type process is utilized to model the returns. Monte Carlo simulations are used to compare the optimal and delta hedging methods.

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  • Bruno R'emillard & Sylvain Rubenthaler, 2012. "Optimal hedging in discrete time," Papers 1211.5035,
  • Handle: RePEc:arx:papers:1211.5035

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    References listed on IDEAS

    1. René Garcia & Èric Renault, 1998. "A Note on Hedging in ARCH and Stochastic Volatility Option Pricing Models," Mathematical Finance, Wiley Blackwell, vol. 8(2), pages 153-161.
    2. Alev{s} v{C}ern'y & Jan Kallsen, 2007. "On the Structure of General Mean-Variance Hedging Strategies," Papers 0708.1715,, revised Jul 2017.
    3. Boyle, Phelim P. & Emanuel, David, 1980. "Discretely adjusted option hedges," Journal of Financial Economics, Elsevier, vol. 8(3), pages 259-282, September.
    4. Jin-Chuan Duan, 1995. "The Garch Option Pricing Model," Mathematical Finance, Wiley Blackwell, vol. 5(1), pages 13-32.
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