Back

G-2012-44

Optimal Hedging when the Underlying Asset Follows a Regime-Switching Markov Process

, , and

BibTeX reference

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.

, 27 pages

Research Axis

Research applications

Publication

, , and
European Journal of Operational Research, 237(1), 312–322, 2014 BibTeX reference