Dynamic programming and mean-variance hedging with partial execution risk

作者：Matsumoto Koichi^*

来源：Review of Derivatives Research, 2009, 12(1): 29-53.

DOI：10.1007/s11147-009-9033-6

• Hedging
• Derivatives
• Liquidity
• Execution

In this paper I consider a hedging problem in an illiquid market where there is a risk that the hedger's order to buy or sell the underlying asset may be executed only partially. In this setting, I find a mean-variance optimal hedging strategy by the dynamic programming method. The solution contains a new endogenous state variable representing the current position in the underlying. The exogenous coefficients in the solution are given by recursive formulas which can be calculated efficiently in Markov models. I illustrate effects of the partial execution risk in several examples.

• 出版日期2009-4