Quotation Rudloff, Birgit. 2009. Coherent hedging in incomplete markets. Quantitative Finance 9 (2): S. 197-206.




In incomplete financial markets, not every contingent claim can be perfectly replicated by a self-financing strategy. In this paper, we minimize the risk that the value of the hedging portfolio falls below the payoff of the claim at time T. We use a coherent risk measure, introduced by Artzner et al., to measure the risk of the shortfall. The dynamic optimization problem of finding a self-financing strategy that minimizes the coherent risk of the shortfall can be split into a static optimization problem and a representation problem. We will deduce necessary and sufficient optimality conditions for the static problem using convex duality methods. The solution of the static optimization problem turns out to be a randomized test with a typical 0–1 structure. Our results improve those obtained by Nakano. The optimal hedging strategy consists of superhedging a modified claim that is the product of the original payoff and the solution to the static problem.


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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Quantitative Finance
Citation Index SSCI
WU-Journal-Rating new FIN-A, STRAT-B, VW-C, WH-B
Language English
Title Coherent hedging in incomplete markets
Volume 9
Number 2
Year 2009
Page from 197
Page to 206
Reviewed? Y
URL http://www.tandfonline.com/doi/full/10.1080/14697680802169787
DOI http://dx.doi.org/10.1080/14697680802169787


Rudloff, Birgit (Details)
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