Optimal hedging when the underlying asset follows a regime-switching Markov process

Pascal François, Geneviève Gauthier and Frédéric Godin

European Journal of Operational Research, 2014, vol. 237, issue 1, 312-322

Abstract: We develop a flexible discrete-time hedging methodology that minimizes the expected value of any desired penalty function of the hedging error within a general regime-switching framework. A numerical algorithm based on backward recursion allows for the sequential construction of an optimal hedging strategy. Numerical experiments comparing this and other methodologies show a relative expected penalty reduction ranging between 0.9% and 12.6% with respect to the best benchmark.

Keywords: Dynamic programming; Hedging; Risk management; Regime switching (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:237:y:2014:i:1:p:312-322

DOI: 10.1016/j.ejor.2014.01.034

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