Review of Financial Studies Vol. 25 No. 6 2012
Dynamic Hedging in Incomplete Markets: A Simple Solution
Abstract
[We provide fully analytical, optimal dynamic hedges in incomplete markets by employing the traditional minimum-variance criterion. Our hedges are in terms of generalized "Greeks" and naturally extend no-arbitrage-based risk management in complete markets to incomplete markets. Whereas the literature characterizes either minimum-variance static, myopic, or dynamic hedges from which a hedger may deviate unless able to precommit, our hedges are time-consistent. We apply our results to derivatives replication with infrequent trading and determine hedges and replication values, which reduce to generalized Black-Scholes expressions in specific settings. We also investigate dynamic hedging with jumps, stochastic correlation, and portfolio management with benchmarking.]
- Volume
- 25
- Issue
- 6
- Pages
- 1845-1896
- Sources
- bibtex:phds-export.bib