CRASH HEDGING STRATEGIES AND WORST-CASE SCENARIO PORTFOLIO OPTIMIZATION

Olaf Menkens ()
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Olaf Menkens: School of Mathematical Sciences, Dublin City University, Glasnevin, Dublin 9, Ireland

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 04, 597-618

Abstract: Crash hedging strategies are derived as solutions of non-linear differential equations which itself are consequences of an equilibrium strategy which make the investor indifferent to uncertain (down) jumps. This is done in the situation where the investor has a logarithmic utility and where the market coefficients after a possible crash may change. It is scrutinized when and in which sense the crash hedging strategy is optimal. The situation of an investor with incomplete information is considered as well. Finally, introducing the crash horizon, an implied volatility is derived.

Keywords: Optimal portfolios; crash modelling; worst-case scenario; changing market coefficients; implied volatility; crash horizon (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1142/S0219024906003706

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