Benchmarked Risk Minimization

25. June 2015
Research Seminars
TU Berlin, Room MA 041, Straße des 17. Juni 136, 10623 Berlin, 4 p.m.
Eckhard Platen (University of Technology Sydney)
The presentation discusses the problem of hedging not perfectly replicable contingent claims by using a benchmark, the numeraire portfolio, as reference unit. The proposed concept of benchmarked risk minimization generalizes classical risk minimization, pioneered by Föllmer, Sondermann and Schweizer. The latter relies on a quadratic criterion, requesting the square integrability of contingent claims and the existence of an equivalent risk neutral probability measure. The proposed concept of benchmarked risk minimization avoids these restrictive assumptions. It employs the real world probability measure as pricing measure and identifies the minimal possible price for the hedgeable part of a contingent claim. Furthermore, the resulting benchmarked profit and loss is only driven by nontraded uncertainty and forms a martingale that starts at zero. Benchmarked profit and losses, when pooled and sufficiently independent, become in total negligible. This property is highly desirable from a risk management point of view. It is making asymptotically benchmarked risk minimization the least expensive method for pricing and hedging of an increasing number of not fully replicable benchmarked contingent claims. This is a joint work with Ke Du.


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