Hedging Errors Induced by Discrete Trading Under an Adaptive Trading Strategy
Risk Management
2010-04-27 v1 Probability
Abstract
Discrete time hedging in a complete diffusion market is considered. The hedge portfolio is rebalanced when the absolute difference between delta of the hedge portfolio and the derivative contract reaches a threshold level. The rate of convergence of the expected squared hedging error as the threshold level approaches zero is analyzed. The results hinge to a great extent on a theorem stating that the difference between the hedge ratios normalized by the threshold level tends to a triangular distribution as the threshold level tends to zero.
Keywords
Cite
@article{arxiv.1004.4526,
title = {Hedging Errors Induced by Discrete Trading Under an Adaptive Trading Strategy},
author = {Mats Brodén and Magnus Wiktorsson},
journal= {arXiv preprint arXiv:1004.4526},
year = {2010}
}
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15 pages