G-2012-44
Optimal Hedging when the Underlying Asset Follows a Regime-Switching Markov Process
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We develop a flexible discrete-time hedging methodology that miminizes the expected value of any desired penalty function of the hedging error within a general regime-switching framework. A numerical algorithm based on backward recursion allows for the sequential construction of an optimal hedging strategy. Numerical experiments comparing this and other methodologies show a relative expected penalty reduction ranging between 0.9% and 12.6% with respect to the best benchmark.
Published August 2012 , 27 pages
Research Axis
Research applications
Publication
Aug 2014
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European Journal of Operational Research, 237(1), 312–322, 2014
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