Title :
Risk estimates for dynamic hedging using convex probability bounds
Author :
Yamada, Yuji ; Imbsz, J.A.
Author_Institution :
California Inst. of Technol., Pasadena, CA, USA
Abstract :
In this paper, we employ convex optimization techniques to compute upper and lower bounds on the tail of an unknown probability distribution given its first m moments. We then apply this to dynamic hedging problems, where we estimate a specific quantile of the wealth balance (hedging error) distribution, known as its value-at-risk. A backward recursive algorithm on a multinomial lattice is used to compute the required moments of the wealth balance. Combining this with the convex optimization probability bounds results in an efficient methodology for estimating the risk resulting from a dynamic hedge
Keywords :
convex programming; probability; risk management; securities trading; backward recursive algorithm; convex optimization probability bounds; dynamic hedging; multinomial lattice; risk estimates; Bonding; Chebyshev approximation; Control systems; Lattices; Optimization methods; Portfolios; Probability distribution; Reactive power; Security; Tin;
Conference_Titel :
American Control Conference, 2001. Proceedings of the 2001
Conference_Location :
Arlington, VA
Print_ISBN :
0-7803-6495-3
DOI :
10.1109/ACC.2001.945821