Research on Quadratic Hedging for Stochastic Payment Styled Claims

Author

Xiao Qing-xian ; Guo Jian-Hua

Author_Institution

Bus. Sch., Univ. of Shanghai for Sci. & Technol., Shanghai, China

fYear

2011

fDate

12-14 Aug. 2011

Firstpage

1

Lastpage

4

Abstract

By measuring the total risk by conditional mean square error between the terminal valuation of hedging portfolio and the total payment during the hedging horizon, and under the constraint of self-financing strategy, in this paper, at first, we properly construct a hedging model to study the quadratic hedging for stochastic payment styled contingent claims; then, during the hedging horizon [0, T], by dynamic programming and backward recursion, we get the recursive expressions of hedging strategies, which can minimize the terminal risk and may be referential to hedging practice.

Keywords

constraint handling; dynamic programming; financial management; mean square error methods; quadratic programming; stochastic processes; backward recursion; conditional mean square error; dynamic programming; hedging horizon; hedging portfolio; hedging strategy; quadratic hedging model; recursive expression; self-financing strategy constraint; stochastic payment styled contingent claim; terminal valuation; Contracts; Cost accounting; Dynamic programming; Europe; Insurance; Portfolios; Stochastic processes;

fLanguage

English

Publisher

ieee

Conference_Titel

Management and Service Science (MASS), 2011 International Conference on

Conference_Location

Wuhan

Print_ISBN

978-1-4244-6579-8

Type

conf

DOI

10.1109/ICMSS.2011.5998453

Filename

5998453