Dual Representation of the Cost of Designing a Portfolio Satisfying Multiple Risk Constraints

Géraldine Bouveret

Applied Mathematical Finance, 2019, vol. 26, issue 3, 222-256

Abstract: We consider, within a Markovian complete financial market, the problem of finding the least expensive portfolio process meeting, at each payment date, three different types of risk criterion. Two of them encompass an expected utility-based measure and a quantile hedging constraint imposed at inception on all the future payment dates, while the other one is a quantile hedging constraint set at each payment date over the next one. The quantile risk measures are defined with respect to a stochastic benchmark and the expected utility-based constraint is applied to random payment dates. We explicit the Legendre-Fenchel transform of the pricing function. We also provide, for each quantile hedging problem, a backward dual algorithm allowing to compute their associated value function by backward recursion. The algorithms are illustrated with a numerical example.

Date: 2019
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DOI: 10.1080/1350486X.2019.1638276

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