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Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: an Application to Hedge Fund Replication

Author

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  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

  • Kyo Yamamoto

    (Graduate School of Economics, University of Tokyo)

Abstract

This paper provides a new method to construct a dynamic optimal portfolio for asset management in a complete market. The method generates a target payoff distribution by the cheapest dynamic trading strategy. It is regarded as an extension of Dybvig (1988a) to continuous-time framework and dynamic portfolio optimization where the dynamic trading strategy is derived analytically by applying Malliavin calculus. As a practical example, the method is applied to hedge fund replication, which extends Kat and Palaro (2005) and Papageorgiou, Remillard and Hocquard (2008) to multiple trading assets with both long and short positions.

Suggested Citation

  • Akihiko Takahashi & Kyo Yamamoto, 2009. "Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: an Application to Hedge Fund Replication," CARF F-Series CARF-F-150, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Mar 2010.
    • Handle: RePEc:cfi:fseres:cf150
    as

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    File URL: https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/155.pdf
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    References listed on IDEAS

    as
    1. Dybvig, Philip H, 1988. "Distributional Analysis of Portfolio Choice," The Journal of Business, University of Chicago Press, vol. 61(3), pages 369-393, July.
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