Non Quadratic Local Risk-Minimization for Hedging Contingent Claims in the Presence of Transaction Costs

Frédéric Abergel () and Nicolas Millot
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Frédéric Abergel: MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec
Nicolas Millot: MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec

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Abstract: This paper is devoted to the study of derivative hedging in incomplete markets when frictions are considered. We extend the general local risk minimisation approach introduced in [1] to account for liquidity costs, and derive the corresponding optimal strategies in both the discrete- and continuous-time settings. We examplify our method in the case of stochastic volatility and/or jump-diffusion models.

Date: 2011-12-06
New Economics Papers: this item is included in nep-ore
Note: View the original document on HAL open archive server: https://hal.science/hal-00621256v2
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