Robust One-Period Option Hedging

Frank Lutgens (), Jos Sturm and Antoon Kolen
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Frank Lutgens: Department of Finance, Maastricht University, Tongerseweg 53, 6200 MD, Maastricht, The Netherlands
Jos Sturm: Department of Econometrics, Tilburg University, Tilburg, The Netherlands
Antoon Kolen: Department of Quantitative Economics, Maastricht University, Maastricht, The Netherlands

Operations Research, 2006, vol. 54, issue 6, 1051-1062

Abstract: We consider robust optimization to cope with uncertainty about the stock return process in one-period option hedging problems. The robust approach relates portfolio choice to uncertainty, making more cautious hedges when uncertainty is high. We represent uncertainty by a set of plausible expected returns of the underlying stocks and show that for this set the robust problem is a second-order cone program that can be solved efficiently. We apply the approach to find an optimal portfolio to hedge an index option.

Keywords: robust optimization; portfolio optimization; nonnegative cones; hedging (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (10)

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