Non Quadratic Local Risk-Minimization for Hedging Contingent Claims in the Presence of Transaction Costs

Frédéric Abergel (1, 2) , Nicolas Millot (1, 2)

1 MAS - Mathématiques Appliquées aux Systèmes - EA 4037
2 FiQuant - Chaire de finance quantitative

This paper is devoted to the study of derivative hedging in incomplete markets when frictions are considered. We extend the general local risk minimisation approach introduced in [1] to account for liquidity costs, and derive the corresponding optimal strategies in both the discrete- and continuous-time settings. We examplify our method in the case of stochastic volatility and/or jump-diffusion models.

Domaines: Finance quantitative [q-fin.CP]; Optimisation et contrôle [math.OC]

Frédéric Abergel, Nicolas Millot. Non Quadratic Local Risk-Minimization for Hedging Contingent Claims in the Presence of Transaction Costs. 2011. ⟨hal-00621256v2⟩