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Dynamic conic hedging for competitiveness

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Abstract

The paper provides a new hedging methodology permitting systematic hedging choices with wide applications. Dynamic concave bid price, and convex ask price functionals from the recent literature are employed to construct new hedging strategies termed dynamic conic hedging. The primary focus of these strategies is to adopt positions maximizing a nonlinear conditional expectation expressed recursively as a concave current bid price for the one step ahead risk held or minimizing the convex current ask price for the risk promised. Risk management and hedging then have a new market value enhancing perspective different from the classical forms of risk mitigation, local variance minimization, or even expected utility maximization.

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Authors and Affiliations

  1. Robert H. Smith School of Business, University of Maryland, College Park, USA

    Dilip B. Madan

  2. Department of Mathematics, Imperial College, London, UK

    Martijn Pistorius

  3. Department of Mathematics, K.U. Leuven, Leuven, Belgium

    Wim Schoutens

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  1. Dilip B. Madan
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  2. Martijn Pistorius
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Correspondence to Dilip B. Madan.

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Madan, D.B., Pistorius, M. & Schoutens, W. Dynamic conic hedging for competitiveness. Math Finan Econ 10, 405–439 (2016). https://doi.org/10.1007/s11579-016-0164-x

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