TY - JOUR
T1 - Mean-variance hedging with uncertain trade execution
AU - Matsumoto, Koichi
N1 - Funding Information:
I would like to dedicate this paper to my late father, Takeo Matsumoto. I wish to thank Professor Shigeo Kusuoka for helpful discussions and comments. I thank the participants of the Workshop and Mid Term Conference on Advanced Mathematical Methods for Finance, for their valuable comments. I am grateful to an anonymous referee for assistance in revising the paper. This research was partially supported by the Ministry of Education, Science, Sports and Culture, Grant-in-Aid for Young Scientists (B), 19740051.
PY - 2009
Y1 - 2009
N2 - This paper studies a hedging problem of a contingent claim in a discrete time model. The contingent claim is hedged by one illiquid risky asset and the hedging error is measured by a quadratic criterion. In our model, trade does not always succeed and then trade times are not only discrete, but also random. The uncertainty of trade execution represents the liquidity risk. First we find an optimal hedging strategy with fixed initial condition. Next we consider an optimal initial condition. Finally, we study a binomial model as a simple example.
AB - This paper studies a hedging problem of a contingent claim in a discrete time model. The contingent claim is hedged by one illiquid risky asset and the hedging error is measured by a quadratic criterion. In our model, trade does not always succeed and then trade times are not only discrete, but also random. The uncertainty of trade execution represents the liquidity risk. First we find an optimal hedging strategy with fixed initial condition. Next we consider an optimal initial condition. Finally, we study a binomial model as a simple example.
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U2 - 10.1080/13504860802583972
DO - 10.1080/13504860802583972
M3 - Article
AN - SCOPUS:70449632587
SN - 1350-486X
VL - 16
SP - 219
EP - 252
JO - Applied Mathematical Finance
JF - Applied Mathematical Finance
IS - 3
ER -