On RVaR-based optimal partial hedging

Alexander Melnikov and Hongxi Wan

Annals of Actuarial Science, 2022, vol. 16, issue 2, 349-366

Abstract: The main aim of this paper is to develop an optimal partial hedging strategy that minimises an investor’s shortfall subject to an initial wealth constraint. The risk criterion we employ is a robust tail risk measure called Range Value-at-Risk (RVaR) which belongs to a wider class of distortion risk measures and contains the well-known measures VaR and CVaR as important limiting cases. Explicit forms of such RVaR-based optimal hedging strategies are derived. In addition, we provide a numerical example to demonstrate how to apply this more comprehensive methodology of partial hedging in the area of mixed finance/insurance contracts in the market with long-range dependence.

Date: 2022
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