Bounding Contingent Claim Prices via Hedging Strategy with Coherent Risk Measures

Jun-ya Gotoh (), Yoshitsugu Yamamoto () and Weifeng Yao ()
Additional contact information
Jun-ya Gotoh: Chuo University
Yoshitsugu Yamamoto: University of Tsukuba
Weifeng Yao: China Universal Asset Management Co., Ltd

Journal of Optimization Theory and Applications, 2011, vol. 151, issue 3, No 11, 613-632

Abstract: Abstract We generalize the notion of arbitrage based on the coherent risk measure, and investigate a mathematical optimization approach for tightening the lower and upper bounds of the price of contingent claims in incomplete markets. Due to the dual representation of coherent risk measures, the lower and upper bounds of price are located by solving a pair of semi-infinite linear optimization problems, which further reduce to linear optimization when conditional value-at-risk (CVaR) is used as risk measure. We also show that the hedging portfolio problem is viewed as a robust optimization problem. Tuning the parameter of the risk measure, we demonstrate by numerical examples that the two bounds approach to each other and converge to a price that is fair in the sense that seller and buyer face the same amount of risk.

Keywords: Incomplete market; Option price bounds; Coherent risk measures; Hedging strategy; Semi-infinite linear optimization (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10957-011-9899-y Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joptap:v:151:y:2011:i:3:d:10.1007_s10957-011-9899-y

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10957/PS2

DOI: 10.1007/s10957-011-9899-y

Access Statistics for this article

Journal of Optimization Theory and Applications is currently edited by Franco Giannessi and David G. Hull

More articles in Journal of Optimization Theory and Applications from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().