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Robust Hedging Valuation Adjustment under Liquidity--Demand Stress

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  • Takayuki Sakuma

Abstract

This paper develops a robust hedging valuation adjustment (HVA) measure for dynamic hedging. Simulated rebalancing and maturity-unwind trades generate a loss distribution for each no-trade-band rule, and we define robust HVA as the worst-case expected loss over a relative-entropy neighborhood of that distribution. Because band width affects turnover, the same relative-entropy radius applied to different bands can imply different levels of demand-liquidity stress. We distinguish a fixed-radius convention from a fixed benchmark-stress convention and show that wider no-trade bands lower rebalancing costs but raise hedge-error risk.

Suggested Citation

  • Takayuki Sakuma, 2026. "Robust Hedging Valuation Adjustment under Liquidity--Demand Stress," Papers 2606.26731, arXiv.org, revised Jun 2026.
    • Handle: RePEc:arx:papers:2606.26731
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    File URL: https://arxiv.org/pdf/2606.26731
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