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Explicit formulas for the minimal variance hedging strategy in a martingale case

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  • Flavio Angelini
  • Stefano Herzel

Abstract

We explicitly compute the optimal strategy in discrete time for a European option and the variance of the corresponding hedging error under the hypothesis that the underlying is a martingale following a Geometric Brownian motion.

Suggested Citation

  • Flavio Angelini & Stefano Herzel, 2007. "Explicit formulas for the minimal variance hedging strategy in a martingale case," Quaderni del Dipartimento di Economia, Finanza e Statistica 35/2007, Università di Perugia, Dipartimento Economia.
  • Handle: RePEc:pia:wpaper:35/2007
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    References listed on IDEAS

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    1. Primbs, James A. & Yamada, Yuji, 2006. "A moment computation algorithm for the error in discrete dynamic hedging," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 519-540, February.
    2. Friedrich Hubalek & Jan Kallsen & Leszek Krawczyk, 2006. "Variance-optimal hedging for processes with stationary independent increments," Papers math/0607112, arXiv.org.
    3. Figlewski, Stephen, 1989. " Options Arbitrage in Imperfect Markets," Journal of Finance, American Finance Association, vol. 44(5), pages 1289-1311, December.
    4. Flavio Angelini & Marco Nicolosi, 2010. "On the Effect of Skewness and Kurtosis Misspecification on the Hedging Error," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 39(3), pages 203-226, November.
    5. Toft, Klaus Bjerre, 1996. "On the Mean-Variance Tradeoff in Option Replication with Transactions Costs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(2), pages 233-263, June.
    6. Flavio Angelini & Stefano Herzel, 2007. "Measuring the error of dynamic hedging: a Laplace transform approach," Quaderni del Dipartimento di Economia, Finanza e Statistica 33/2007, Università di Perugia, Dipartimento Economia.
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    Citations

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    Cited by:

    1. Ke Nian & Thomas F. Coleman & Yuying Li, 2018. "Learning minimum variance discrete hedging directly from the market," Quantitative Finance, Taylor & Francis Journals, vol. 18(7), pages 1115-1128, July.
    2. Mirella Damiani, 2010. "Labour regulation, corporate governance and varieties of capitalism," Quaderni del Dipartimento di Economia, Finanza e Statistica 76/2010, Università di Perugia, Dipartimento Economia.
    3. Stefano Herzel & Marco Nicolosi & Cătălin Stărică, 2012. "The cost of sustainability in optimal portfolio decisions," The European Journal of Finance, Taylor & Francis Journals, vol. 18(3-4), pages 333-349, May.
    4. Damiani, Mirella & Pompei, Fabrizio & Ricci, Andrea, 2011. "Temporary job protection and productivity growth in EU economies," MPRA Paper 29698, University Library of Munich, Germany.
    5. Davide Castellani & Fabio Pieri, 2011. "Foreign Investments and Productivity Evidence from European Regions," Quaderni del Dipartimento di Economia, Finanza e Statistica 83/2011, Università di Perugia, Dipartimento Economia.
    6. Silvia Micheli, 2010. "Learning Curve and Wind Power," Quaderni del Dipartimento di Economia, Finanza e Statistica 81/2010, Università di Perugia, Dipartimento Economia.
    7. St'ephane Goutte & Nadia Oudjane & Francesco Russo, 2012. "Variance Optimal Hedging for discrete time processes with independent increments. Application to Electricity Markets," Papers 1205.4089, arXiv.org.
    8. Francesco Venturini, 2011. "Product variety, product quality, and evidence of Schumpeterian endogenous growth: a note," Quaderni del Dipartimento di Economia, Finanza e Statistica 93/2011, Università di Perugia, Dipartimento Economia.

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    More about this item

    Keywords

    minimal variance hedging;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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