On infinite-horizon minimum-cost hedging under cone constraints

Kevin Huang ()

No 2000-22, Working Papers from Utah State University, Department of Economics

Abstract: We prove there exists and analyze a strategy that minimizes the cost of hedging a liability stream in infinite-horizon incomplete security markets with a type of constraints that feasible portfolio strategies form a convex cone. We provide a theorem that extends Stiemke Lemma to over cone domains and we use the result to construct a series of primal-dual problems. Applying stochastic duality theory, dynamic programming technique and the theory of convex analysis to the dual formulation, we decompose the infinite-horizon dynamic hedging problem into one-period static hedging problems such that optimal portfolios in different events can be solved for independently.

Keywords: Infinite horizon; minimum-cost hedging; cone constraints (search for similar items in EconPapers)
JEL-codes: C61 C63 G10 G20 (search for similar items in EconPapers)
Pages: 21 pages
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (2)

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Journal Article: On infinite-horizon minimum-cost hedging under cone constraints (2002)
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