Hedging by Sequential Regressions Revisited

Cass Business School Research Paper

Mathematical Finance, 2009, 19(4), 591-617

27 Pages Posted: 20 Mar 2008 Last revised: 30 Sep 2019

See all articles by Aleš Černý

Aleš Černý

Cass Business School, City, University of London

Jan Kallsen

Munich University of Technology

Date Written: July 3, 2007

Abstract

Almost 20 years ago Foellmer and Schweizer (1989) suggested a simple and influential scheme for the computation of hedging strategies in an incomplete market. Their approach of local risk minimization results in a sequence of one-period least squares regressions running recursively backwards in time. In the meantime there have been significant developments in the global risk minimization theory for semimartingale price processes. In this paper we revisit hedging by sequential regression in the context of global risk minimization, in the light of recent results obtained by Cerny and Kallsen (2007). A number of illustrative numerical examples is given.

Keywords: option, hedging, CAPM, sequential regression, opportunity-neutral measure

JEL Classification: G11, G13, C61

Suggested Citation

Černý, Aleš and Kallsen, Jan, Hedging by Sequential Regressions Revisited (July 3, 2007). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=1004706 or http://dx.doi.org/10.2139/ssrn.1004706

Aleš Černý (Contact Author)

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Jan Kallsen

Munich University of Technology ( email )

Arcisstrasse 21
Munich, 80333
Germany

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