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Title: Optimal Hedging when the Underlying Asset Follows a Regime-switching Markov Process
Authors: François, Pascal
Gauthier, Geneviève
Godin, Frédéric
Keywords: Dynamic programming
Hedging
Risk management
Regime switching
Issue Date: 2012-08
Series/Report no.: Cahiers du CIRPÉE;12-34
Abstract: We develop a flexible discrete-time hedging methodology that minimizes the expected value of any desired penalty function of the hedging error within a general regime-switching framework. A numerical algorithm based on backward recursion allows for the sequential construction of an optimal hedging strategy. Numerical experiments comparing this and other methodologies show a relative expected penalty reduction ranging between 0.9% and 12.6% with respect to the best benchmark.
URI: https://depot.erudit.org/id/003672dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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