A novel portfolio optimization method and its application to the hedging problem

Halidias Nikolaos ()
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Halidias Nikolaos: Department of Statistics and Actuarial – Financial Mathematics, University of the Aegean, 83200 Samos, Greece

Monte Carlo Methods and Applications, 2024, vol. 30, issue 3, 249-267

Abstract: In this article we will propose a novel, self-financing, dynamic and path dependent portfolio trading strategy which is based on the well known principle “sell high – buy low”. Trading strategies are important also for the hedging problem selling/buying an option. The main problem of the writer of an option is how to invest the amount that she has received selling the option therefore the proposed trading strategy play an important role here. We will see that the hedging problem reduces to an optimization one and therefore the portfolio optimization and the hedging problem are closely related. We will also propose a deterministic portfolio selection method (i.e., without making any assumption-guess about the assets) and a notion of a deterministic fair price of an option.

Keywords: Dynamic portfolio optimization; option pricing; hedging strategies; implied parameters; imbedded asset pricing model; external asset pricing model (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/mcma-2024-2009

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