Option valuation and hedging using asymmetric risk function: asymptotic optimality through fully nonlinear Partial Differential Equations - Archive ouverte HAL
Article Dans Une Revue Finance and Stochastics Année : 2020

Option valuation and hedging using asymmetric risk function: asymptotic optimality through fully nonlinear Partial Differential Equations

Résumé

Discrete time hedging produces a residual risk, namely, the tracking error. The major problem is to get valuation/hedging policies minimizing this error. We evaluate the risk between trading dates through a function penalizing asymmetrically profits and losses. After deriving the asymptotics within a discrete time risk measurement for a large number of trading dates, we derive the optimal strategies minimizing the asymptotic risk in the continuous time setting. We characterize the optimality through a class of fully nonlinear Partial Differential Equations (PDE). Numerical experiments show that the optimal strategies associated with discrete and asymptotic approach coincides asymptotically.
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Dates et versions

hal-01761234 , version 1 (08-04-2018)

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Citer

Emmanuel Gobet, Isaque Pimentel, Xavier Warin. Option valuation and hedging using asymmetric risk function: asymptotic optimality through fully nonlinear Partial Differential Equations. Finance and Stochastics, 2020, 24 (3), pp.633-675. ⟨10.1007/s00780-020-00428-1⟩. ⟨hal-01761234⟩
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