Hedging Errors Induced by Discrete Trading Under an Adaptive Trading Strategy

Mats Brod\'en and Magnus Wiktorsson

Papers from arXiv.org

Abstract: Discrete time hedging in a complete diffusion market is considered. The hedge portfolio is rebalanced when the absolute difference between delta of the hedge portfolio and the derivative contract reaches a threshold level. The rate of convergence of the expected squared hedging error as the threshold level approaches zero is analyzed. The results hinge to a great extent on a theorem stating that the difference between the hedge ratios normalized by the threshold level tends to a triangular distribution as the threshold level tends to zero.

Date: 2010-04
New Economics Papers: this item is included in nep-fmk
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