Dynamic hedging of conditional value-at-risk

Alexander Melnikov and Ivan Smirnov

Insurance: Mathematics and Economics, 2012, vol. 51, issue 1, 182-190

Abstract: In this paper, the problem of partial hedging is studied by constructing hedging strategies that minimize conditional value-at-risk (CVaR) of the portfolio. Two dual versions of the problem are considered: minimization of CVaR with the initial wealth bounded from above, and minimization of hedging costs subject to a CVaR constraint. The Neyman–Pearson lemma approach is used to deduce semi-explicit solutions. Our results are illustrated by constructing CVaR-efficient hedging strategies for a call option in the Black–Scholes model and also for an embedded call option in an equity-linked life insurance contract.

Keywords: IB10; IM01; IM10; IM53; Conditional value-at-risk; Dynamic hedging; Stochastic modeling; Quantile hedging; Unit-linked contracts (search for similar items in EconPapers)
JEL-codes: C61 G13 G22 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:51:y:2012:i:1:p:182-190

DOI: 10.1016/j.insmatheco.2012.03.011

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